Zero Hedge - Borrowing Costshttp://www.zerohedge.com/taxonomy/term/10176/0
en"We Are Failing To Deliver On Our Obligations As Americans"http://www.zerohedge.com/news/2015-03-01/we-are-failing-deliver-our-obligations-americans
<p><a href="http://www.firstrebuttal.com/2015/02/28/im-bedazzled-by-the-bewilderment-surrounding-the-feds-behaviour-so-ive-de-engineered-to-the-bare-basics-and-oh-boy/"><em>Submitted by Thad Beversdorf via First Rebuttal blog</em></a>,</p>
<p><u><strong>I&rsquo;m Bedazzled by the Bewilderment Surrounding the Fed&rsquo;s Behaviour... So I&rsquo;ve De-engineered to the Bare Basics... and Oh Boy!</strong></u></p>
<p><span style="color: #000000;">According to former Fed Chair Ben Bernanke in an&nbsp;excerpt from a Nov. 3, 2009 Bloomberg article, the Fed strategy is that</span><span style="color: #000000;">&nbsp;<strong><em>&ldquo;..large-scale asset purchases should boost economic growth through lower borrowing costs and higher stock prices&hellip;&rdquo;</em></strong>. &nbsp;Now as depicted in the following chart (by Gallup) we see that the top 5% own almost 75% of financial wealth (i.e. stocks) while the bottom 80% own less than 5% (these are 2010 figures and certainly things&nbsp;have gotten significantly worse over the past 4 years). &nbsp;</span></p>
<p><a href="http://www.firstrebuttal.com/wp-content/uploads/2015/02/Screen-Shot-2015-02-28-at-10.41.28-AM.png"><img alt="Screen Shot 2015-02-28 at 10.41.28 AM" class="alignnone size-full wp-image-1626" src="http://www.firstrebuttal.com/wp-content/uploads/2015/02/Screen-Shot-2015-02-28-at-10.41.28-AM.png" style="width: 600px; height: 740px;" /></a></p>
<p><strong>Rather than boosting economic growth through incentivizing capital expenditures as has been the way of monetary policies gone by, this new Fed strategy, to explicitly target higher stock prices, is meant to create enough excess wealth to those on top&nbsp;by way of&nbsp;stocks such that some of that wealth would then trickle down to the rest of America. &nbsp;</strong>The Fed has made this&nbsp;clear both verbally and by way of action, that is, by ensuring (manipulating) higher stock prices. &nbsp;The result is that low cost debt is being used to invest into a risk free stock market. &nbsp;To get an idea of how this works look at the following table which I pulled from a December 2014 report from <a href="http://www.factset.com/websitefiles/PDFs/buyback/buyback_12.16.14" target="_blank">Factset.com</a>,</p>
<p><a href="http://www.firstrebuttal.com/wp-content/uploads/2015/02/Screen-Shot-2015-02-28-at-10.48.59-AM.png"><img alt="Screen Shot 2015-02-28 at 10.48.59 AM" class="alignnone size-full wp-image-1627" src="http://www.firstrebuttal.com/wp-content/uploads/2015/02/Screen-Shot-2015-02-28-at-10.48.59-AM.png" style="width: 600px; height: 239px;" /></a></p>
<p><strong>So during 2014, these 10 companies spent roughly $150B on share buybacks and paid out $55B in dividends, leading to an average market cap increase of around 25% across the 10 firms.</strong> &nbsp;It appears then that firms have been taking advantage of the low cost debt to borrow and buy back shares to increase market capital and pay out dividends which are typically reinvested directly&nbsp;back into the market.</p>
<p>For instance, IBM has borrowed $33B since 2012 and has repurchased $37B worth of stock. &nbsp;Apple spent circa 9x the amount on share buybacks as they did on capital expenditures in 2014. &nbsp;The point here is that the Fed&rsquo;s&nbsp;policy strategy, as expressed by Bernanke above, of lowering borrowing costs and targeting higher stock prices to create wealth at the top was extremely successful. &nbsp;In fact, I doubt Bernanke ever dreamed how effective his wealth creation strategy would be.</p>
<p><strong>However, the second part of the Fed&rsquo;s&nbsp;policy strategy was to have some of that extraordinary wealth trickle down to the 90%ers. &nbsp;Unfortunately this part of the strategy has failed miserably.</strong> &nbsp;Now as we&rsquo;ve discussed many time here on First Rebuttal, the second part of the strategy was inherently flawed in such a way so as to actually necessitate&nbsp;its failure. &nbsp;That is, by targeting (guaranteeing) higher stock prices you force CEO&rsquo;s and all other investors to push available capital that would otherwise have been reinvested back into the company and other economic investments to simply allocate&nbsp;directly into the market. &nbsp;Meaning no need or money left for hiring, and in fact, the layoffs continue along with the share buybacks.</p>
<p><strong>Just how many layoffs are continuing is becoming difficult to ascertain. &nbsp;Ironically I found the following notice from the <a href="http://www.bls.gov/news.release/pdf/mmls.pdf" target="_blank">BLS</a>&nbsp;in its last Layoff Report&hellip;</strong></p>
<p><a href="http://www.firstrebuttal.com/wp-content/uploads/2015/02/Screen-Shot-2015-02-28-at-11.44.38-AM.png"><img alt="Screen Shot 2015-02-28 at 11.44.38 AM" class="alignnone size-full wp-image-1628" src="http://www.firstrebuttal.com/wp-content/uploads/2015/02/Screen-Shot-2015-02-28-at-11.44.38-AM.png" style="width: 600px; height: 180px;" /></a></p>
<p><strong>But suffice it to say looking at the U6 figure we know hiring for real breadwinner jobs has been sparse at best (we&rsquo;ll take a detailed&nbsp;look shortly). </strong>&nbsp;So the result of not only targeting but guaranteeing an upward moving market, which the Fed has been very explicit about doing, has literally prevented the trickle down part of the trickle down strategy meaning all we&rsquo;ve attained is extreme wealth creation to those on top. &nbsp;And this seems to be recognized by essentially everyone.</p>
<p>What becomes obvious in researching the topic of &lsquo;trickle down economics&rsquo; is that this is one subject that appears to have almost unanimous&nbsp;agreement amongst everyone outside of the political class. &nbsp;Left, Right, Gay, Straight, Religious, Atheist, you name it they agree on the subject unless they hold a political office. &nbsp;In fact, the resounding agreement is that&nbsp;this latest experiment has been a tremendous failure. &nbsp;That said,<strong> here we are in year 6 of the now completely failed experiment with no signs of changing course. </strong>&nbsp;Rather than allocating efforts to reshaping our economic growth strategy, all efforts seem to be focused on selling a false story of success to the American people.</p>
<p><strong>So this brings us to the debate around whether the parabolic move in equity valuations is the same as last time, meaning the asset bubble the eventually burst in 2008. </strong>&nbsp;The &lsquo;secular bulls&rsquo; are screaming &ldquo;It is different this time!&rdquo;. &nbsp;And well I agree, things are very different this time around. &nbsp;But is that a good thing or a bad thing? &nbsp;Well let&rsquo;s take a stroll past all of the bullshit nonsense from both sides of the bull bear coin and just look at the very parameters that are time tested indications&nbsp;of growth and valuation.</p>
<p><a href="http://www.firstrebuttal.com/wp-content/uploads/2015/02/Screen-Shot-2015-02-27-at-7.40.01-PM.png"><img alt="Screen Shot 2015-02-27 at 7.40.01 PM" class="alignnone wp-image-1619" src="http://www.firstrebuttal.com/wp-content/uploads/2015/02/Screen-Shot-2015-02-27-at-7.40.01-PM.png" style="width: 599px; height: 404px;" /></a></p>
<p>So just on pure price level we see about a 25% increase between 2007 and today on the S&amp;P 500. &nbsp;That would suggest we have had material&nbsp;improvement today relative to 2007. &nbsp;Now let&rsquo;s have a look at some multiples to see how we feel about our growth prospects relative to 2007.</p>
<p><a href="http://www.firstrebuttal.com/wp-content/uploads/2015/02/Market-Valuation.jpg"><img alt="Market Valuation" class="alignnone wp-image-1608" src="http://www.firstrebuttal.com/wp-content/uploads/2015/02/Market-Valuation.jpg" style="width: 600px; height: 371px;" /></a></p>
<p>The chart depicts price to sales of S&amp;P 500 companies and the&nbsp;Adjusted Buffet Indicator. &nbsp;We are using price to sales because it is a much better long term gauge than price to earnings as earnings, especially given all of the share buybacks and reallocation of funds from capex to income, is easily manipulated in the short term. &nbsp;What we find in price to sales is that today&rsquo;s multiple is 30% higher than in 2007 (according to multpl.com). &nbsp;This suggests the market is pricing in some pretty heavy growth relative to the expected growth in 2007.</p>
<p><strong>The Adjusted Buffet indicator is a gauge I developed to adjust out reported economic gains that are solely a function of consumption from debt rather than income.</strong> &nbsp;The idea being that debt consumption is actually a net negative to economic growth and therefore is nonsensical to include in growth measures. &nbsp;What we see is that apples to apples the Adjusted Buffet indicator has grown by 150% since 2007, suggesting that either the economy needs to accelerate significantly or market pricing needs to come down.</p>
<p>And really this is the crux of the whole debate. &nbsp;<strong>Is the economy poised to accelerate or will the market revert back to historic norms through price collapse, as it did in 2008. &nbsp;So let&rsquo;s have a look at our growth prospects. </strong>&nbsp;&lsquo;Secular bulls&rsquo; are obviously claiming this time is very different from last time arguing that there will be no repricing as fundamentals actually do signal growth acceleration. &nbsp;Now that&rsquo;s what they&rsquo;re claiming but as we always do here at First Rebuttal, let&rsquo;s have our own look to validate or discredit those claims. &nbsp;Specifically, we are looking for signals of economic acceleration that would support the implied expectation of&nbsp;relatively higher future corporate cash flows.</p>
<p><a href="http://www.firstrebuttal.com/wp-content/uploads/2015/02/GDP-Growth.jpg"><img alt="GDP Growth" class="alignnone wp-image-1612" src="http://www.firstrebuttal.com/wp-content/uploads/2015/02/GDP-Growth.jpg" style="width: 600px; height: 370px;" /></a></p>
<p>The above chart is the official real average GDP growth over a 5 yr period ending in the subject year. &nbsp;The idea is to see if generally throughout the economy we see signals of stronger growth than we had in 2007. &nbsp;What we find is that economic growth&nbsp;is 24% lower than it was is 2007. &nbsp;So this does not support today&rsquo;s higher multiples. &nbsp;But let&rsquo;s keep going. <strong>&nbsp;The market is certainly pricing higher multiples today than 2007 and so surely we should&nbsp;find the growth source for these higher multiples if we just keep digging.</strong></p>
<p><a href="http://www.firstrebuttal.com/wp-content/uploads/2015/02/Income.jpg"><img alt="Income" class="alignnone wp-image-1611" src="http://www.firstrebuttal.com/wp-content/uploads/2015/02/Income.jpg" style="width: 600px; height: 347px;" /></a></p>
<p><strong>In the above chart, sourced from the <a href="http://www.federalreserve.gov/pubs/bulletin/2014/pdf/scf14.pdf" target="_blank">Federal Reserve</a>, we see a 10% reduction in cash inflows for the American consumer&nbsp;and we see a whopping 40% decline in net worth to the bottom 90% since 2007. </strong>&nbsp;Historically, 70% of economic growth has come directly by way of expenditures from the American consumer. &nbsp;One has to ask oneself, does a consumer with less cash inflow and significantly lower wealth, as absolutely evidenced in the above chart i.e. this is not arguable, lead to sustained higher expected expenditures and thus future corporate cash flows?? &nbsp;The market apparently thinks so, unless we can find another source for the market&rsquo;s growth expectations. &nbsp;So let&rsquo;s carry on&hellip;</p>
<p><strong>Well consumer cash flows can increase via a rise in income&nbsp;or reduction in costs. </strong>&nbsp;Above is the income&nbsp;side which failed to show any rational expectation for signs of consumer expenditures&nbsp;growth but what about the cost side? &nbsp;Well let&rsquo;s take a look at consumers&rsquo; cost of goods&nbsp;and debt service relative to 2007 to see if we have freed up some cash on the consumer&rsquo;s cost side.</p>
<p><img alt="Screen Shot 2015-02-27 at 1.33.16 PM" class="alignnone wp-image-1613" src="http://www.firstrebuttal.com/wp-content/uploads/2015/02/Screen-Shot-2015-02-27-at-1.33.16-PM.png" style="width: 600px; height: 363px;" /></p>
<p><strong>The deflator is a better measure of the bare necessities as these are generally domestic goods and services as opposed to imported e.g. food, rent, public transport, etc. </strong>&nbsp;And so we see that cost of goods and services&nbsp;on just the staples have moved up about 2% per year despite the CPI measurement of closer to 1% per year. &nbsp;And so it is clear from the above chart that we had no price relief since 2007 and as such still no logical expectation for increased consumer expenditures. &nbsp;But what about debt service? &nbsp;Interest rates are lower so perhaps the American consumer has freed up some cash flow due to lower rates?</p>
<p><a href="http://www.firstrebuttal.com/wp-content/uploads/2015/02/DebtGDP.jpg"><img alt="Debt&amp;GDP" class="alignnone wp-image-1610" src="http://www.firstrebuttal.com/wp-content/uploads/2015/02/DebtGDP.jpg" style="width: 601px; height: 356px;" /></a></p>
<p>Despite the decline in prime interest rates, <strong>average consumer credit rates saw only a 6% decline (from 14.5% to 13.7%, sourced from St. Louis Fed) vs an increase in consumer credit levels of around 30%, as depicted in the above chart.</strong> &nbsp;The implication is that the American consumer has increased their total debt service relative to 2007 meaning expected consumer expenditures should be lower than in 2007.&nbsp; This means that both the income and cost side of the American consumes&rsquo; cash flows provide an expectation of lowered consumer&nbsp;expenditures relative to 2007. &nbsp;Thus current market multiples should actually be lower not higher based on the American consumer&rsquo;s financial position. &nbsp;But the search must go on&hellip; we are nothing if not perseverant here at F.R. so let&rsquo;s keep on truck&rsquo;n.</p>
<p>Ok,&nbsp;so what&nbsp;if&nbsp;consumer cash flows are down and have no signals of improving relative to 2007.&nbsp; This doesn&rsquo;t necessitate that multiples need&nbsp;actually be lower than in 2007. &nbsp;If each dollar is being used more effectively than in 2007 we could actually generate higher ultimate corporate cash flow&nbsp;growth than in 2007 and this could&nbsp;support higher market valuations. &nbsp;Let&rsquo;s take a look&hellip;</p>
<p><a href="http://www.firstrebuttal.com/wp-content/uploads/2015/02/Resource-Effectiveness.jpg"><img alt="Resource Effectiveness" class="alignnone wp-image-1609" src="http://www.firstrebuttal.com/wp-content/uploads/2015/02/Resource-Effectiveness.jpg" style="width: 600px; height: 372px;" /></a></p>
<p>The above chart depicts how effectively we are using both money supply and debt to generate economic growth relative to 2007. &nbsp;And we find that our effectiveness at using money supply has declined by about 25% while our ability to generate output growth from debt has plummeted by 75% since 2007. &nbsp;This actually tells us that even if cash flows were the same as in 2007 our overall growth would still be slower. &nbsp;Given the American consumer actually has less cash flow our reduced effectiveness will&nbsp;result in much lower expected&nbsp;growth than in 2007 and, as such, should result in&nbsp;lower market multiples based on the consumer and economic efficiency.</p>
<p><strong>This is not looking promising for validating the higher market multiples but there could be one saving grace to all of this. </strong>&nbsp;Jobs are the key to every economy. &nbsp;The tighter the job market the greater the income distribution. &nbsp;The greater the income distribution the greater all of the above become. &nbsp;And so let&rsquo;s take a look at jobs today relative to 2007 to look for signs of a tighter job market.</p>
<p><a href="http://www.firstrebuttal.com/wp-content/uploads/2015/02/Employment.jpg"><img alt="Employment" class="alignnone wp-image-1607" src="http://www.firstrebuttal.com/wp-content/uploads/2015/02/Employment.jpg" style="width: 600px; height: 385px;" /></a></p>
<p><strong>Disappointingly&nbsp;we find that the job market is much looser than it was in 2007 with unemployed and underemployed 26% higher today. </strong>&nbsp;And so the likelihood of higher cash flows stemming from a tighter job market is essentially zero, especially given the continuing trend to trade away employees for share buybacks.</p>
<p><u><strong>And so what we have done by way of the above analysis is provide the proof for the market&rsquo;s mispricing. </strong></u>&nbsp;Thing of it is, we already knew the market is mispriced. &nbsp;As discussed at the beginning of the&nbsp;article The Fed has told us several times that their mandate for the past 6 years has been to manipulate the market higher so that it creates wealth for those at the top in hopes that this wealth will trickle down onto the rest of America. &nbsp;Based on that declaration of price manipulation, we know the market is mispriced. &nbsp;There is nothing grey or convoluted about that. &nbsp;None of this has been done in secret. &nbsp;So why is it that these TV pundits and politicians spend so much time pitching that the market is fairly valued?? &nbsp;And<strong> how is it that those&nbsp;deemed market &lsquo;pros&rsquo; are buying into it??</strong></p>
<p>Well perhaps it is not so much that these market pros are buying into it as they are trying to convince us that nothing needs to change. &nbsp;You see while the Fed&rsquo;s manipulation has not been done covertly <strong>the fact that it has failed to create any benefit to the bottom 90% of Americans is very much being kept a secret.</strong> &nbsp;Those on top for which the current Fed manipulation is creating extraordinary wealth absolutely do not want a change of policies. &nbsp;And why would they? &nbsp;They are earning incredible wealth while taking no risk.</p>
<p><strong>This completely perverts the basis of capitalism which results in huge misallocations of resources.</strong> &nbsp;It is this very misallocation of resources that not only created the economic destruction we saw in the above charts but will continue to deepen the grave we are digging ourselves. &nbsp;What no one can say for certain is how long the Fed manipulation will&nbsp;last because we&rsquo;ve never been in a situation where the open mandate has been explicitly to push stock prices higher.</p>
<p><u><strong><em>The hope was that the wealth would trickle down and improve the fundamentals enough to support the market valuation so that the Fed could quietly hand the market back over to fundamentals as the main pricing mechanism. &nbsp;Unfortunately what they&rsquo;ve now realized is that the fundamentals are not going to catch up to the market valuation. &nbsp;And so the Fed&nbsp;will have to either continue to manipulate the market or allow it to reprice materially downward.</em></strong></u></p>
<p><strong>I expect the Fed has no idea what the next move will be. </strong>&nbsp;As I&rsquo;ve mentioned in the past the Fed can theoretically continue as long as USD strength holds up. &nbsp;If USD devalues significantly the Fed will have to step back and the market will reprice at that point. &nbsp;That said, there&nbsp;doesn&rsquo;t seem to be a near term concern for USD weakness. &nbsp;But you can see what an incredibly difficult conundrum the Fed has created for itself and for the nation.</p>
<p>By implementing the wrong policies and then refusing to acknowledge it&nbsp;early on, the Fed has undoubtedly&nbsp;created irreparable&nbsp;destruction for all but the very top of the food chain. &nbsp;The destruction is already slowly playing out and that is clear when looking at&nbsp;income, net worth and consumer debt levels. &nbsp;And at some point, as we saw in 2008, an unimaginable amount of pain is going to hit home almost overnight. &nbsp;What more can anyone say about this.</p>
<p><strong>The market is way out of whack and that will continue until it doesn&rsquo;t. &nbsp;In the meantime 90% of America will slowly degrade. &nbsp;How can any of this be considered a success as we hear so often from the market pros? </strong>&nbsp;The one thing that is clear in all of this mess is that our policymakers have failed miserably and so too then have our legislators for allowing this nonsense to continue. &nbsp;But worse is that we the people are failing as Americans. &nbsp;We have an obligation to those who came before us and did their job as Americans and to those who will come after deserving as many rights as were passed onto us.</p>
<p><strong>But we are failing to deliver on our obligations as Americans, that is undeniable. </strong>&nbsp;We are allowing the political class to plunder our wealth, negate our freedoms and desecrate our Constitution. &nbsp;Sadly we have become the immoral populace our founding fathers warned all future generations not to become. &nbsp;As the &lsquo;Founding Father of Scholarship and Education&rsquo;, Noah Webster, put it in 1832,</p>
<blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><em>&ldquo;<span style="color: #000000;">if the citizens neglect their duty and place unprincipled men in office, the government will soon be corrupted; laws will be made, not for the public good, so much as for selfish or local purposes; corrupt or incompetent men will be appointed to execute; the public revenues will be squandered on unworthy men; and the rights of the citizens will be violated or disregarded. If a republican government fails to secure public prosperity and happiness,&nbsp;</span>it must be because the citizens neglect the Divine commands and elect bad men to make and administer the laws&rdquo;</em></p>
</blockquote>
<p><strong>The duty and obligation is ours and so too then are the failures and successes of our society.</strong> &nbsp;Unfortunately ours will be the first generation to have failed at being American. &nbsp;Yet regrettably more unfortunate is that it will be the innocent&nbsp;generations yet to come that will bear the full costs of our failures. &nbsp;We are 15 years in to what is absolute denial regarding the competence of our nation&rsquo;s policymakers. &nbsp;Their failures in taking us to a false war in Iraq, in making a mockery of&nbsp;our rights as Americans and in destroying our&nbsp;economic opportunities are our failures. &nbsp;<strong>Yet here we sit, silent and indifferent to our own demise; so completely antithetical to the character of a true American.</strong></p>
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http://www.zerohedge.com/news/2015-03-01/we-are-failing-deliver-our-obligations-americans#commentsAppleBen BernankeBen BernankeBLSBorrowing CostsCapital ExpendituresConsumer CreditCPIETCFederal ReserveGallupIraqMoney SupplyNoneSt Louis FedSt. Louis FedSun, 01 Mar 2015 18:45:37 +0000Tyler Durden502678 at http://www.zerohedge.com3 Things - High Yield Warning, Yellen's Employment & Economyhttp://www.zerohedge.com/news/2015-02-26/3-things-high-yield-warning-yellens-employment-economy
<p><a href="http://streettalklive.com/index.php/daily-x-change/2623-3-things-high-yield-warning-yellen-s-employment-economy.html"><em>Submitted by Lance Roberts via STA Wealth Management</em></a>,</p>
<h2><u><strong>A High-Yield Warning</strong></u></h2>
<p>With Janet Yellen recently warning about overvaluation in the bond market, I thought it would be important to look at potentially one of the single most overvalued areas in that market - high yield. <a href="http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20150128.pdf">To wit:</a></p>
<blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>&quot;However, the staff report noted valuation pressures in some asset markets. <strong>Such pressures were most notable in corporate debt markets, despite some easing in recent months.</strong> In addition, valuation pressures appear to be building in the CRE sector, as indicated by rising prices and the easing in lending standards on CRE loans. <strong>Finally, the increased role of bond and loan mutual funds, in conjunction with other factors, may have increased the risk that liquidity pressures could emerge in related markets if investor appetite for such assets wanes</strong>. The effects on the largest banking firms of the sharp decline in oil prices and developments in foreign exchange markets appeared limited,<strong> although other institutions with more concentrated exposures could face strains if oil prices remain at current levels for a prolonged period.&quot;</strong></p>
</blockquote>
<p>There is a significant chunk of high-yield debt that is associated with the oil and gas drilling sector that was used to chase <em>&quot;fracking&quot;</em> opportunities in Texas, Oklahoma and North Dakota. The one-two punch will come from a sustained period of low oil prices and a potential rise in borrowing costs for the sector.&nbsp; As <a href="http://streettalklive.com/index.php/component/flexicontent/2-the-daily-x-change/2604-thoughts-on-whether-oil-prices-finally-bottomed.html?Itemid=164">I have discussed previously</a>:</p>
<blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>&quot;But with valuations in the energy space exploding due to falling revenue and profitability, there is likely a good bit of &quot;shaking out&quot; left before this reversion is complete. (Also be careful of highly indebted oil related investments,<strong> there will likely be more liquidations than acquisitions in the not so distant future.</strong>)&quot;</p>
</blockquote>
<p>There is little doubt that a <em>&quot;bubble&quot;</em> has formed within the high-yield sector due to the incessant <em>&quot;chase for yield&quot;</em> given the Fed&#39;s ongoing drive to push interest rates toward the zero-bound. This has led investors to take on substantially more <em>&quot;risk&quot;</em> than they most likely realize which will result in substantial loss of principal during a mean-reverting event.</p>
<p>The chart below shows the spread between high-yield <em>(junk bonds)</em> and both AAA corporate bonds and 10-year Treasury bonds. When the spread between corporate AAA bonds and BB yields has historically gapped above 3%, the markets have historically experienced a fairly sharp contraction as <em>&quot;risk&quot;</em> was repriced. Currently, that spread is sitting at 3.04% as of the end of January.</p>
<p><a class="highslide ageent-ru" href="http://streettalklive.com/images/1dailyxchange/2015/Yield-Spread-BB-AAA-022515.PNG" target="_blank" title="Yield-Spread-BB-AAA-022515"><img alt="Yield-Spread-BB-AAA-022515" class="i_want_img5" src="http://streettalklive.com/images/1dailyxchange/2015/Yield-Spread-BB-AAA-022515.PNG" style="height: 380px; width: 601px;" /></a></p>
<p>The next chart shows the impact of the Federal Reserve&#39;s liquidity push as it relates to <em>&quot;risk taking&quot;</em> by investors. Notice the high yield (junk bonds) rose sharply in price while the Federal Reserve was injecting the financial system with liquidity. However, when the Federal Reserve began <em>&quot;tapering&quot;</em> QE3, the price of high yield bonds declined pushing rates higher.&nbsp;</p>
<p>In other words, <em>&quot;risk&quot;</em> is coming out of the market as money seeks <em>&quot;safety&quot;</em> which has pushed Treasury bond yields below 2%.&nbsp;<span style="color: #005dab;"><em><strong>(Note:</strong> the last two times T-bond yields fell below 2% was during the debt ceiling debate/government default threat in 2011 and the Eurozone crisis in 2012. In both cases the market experienced a rather sharp correction.)</em></span></p>
<p><em><a class="highslide ageent-ru" href="http://streettalklive.com/images/1dailyxchange/2015/HYG-SP500-QE-022515.png" target="_blank" title="HYG-SP500-QE-022515"><img alt="HYG-SP500-QE-022515" class="i_want_img5" src="http://streettalklive.com/images/1dailyxchange/2015/HYG-SP500-QE-022515.png" style="width: 599px; height: 265px;" /></a></em></p>
<p>While the markets currently await the arrival of the ECB&#39;s version of QE, the warning being thrown off by high yield bonds warrants some attention.&nbsp;</p>
<h2>&nbsp;</h2>
<h2><u><strong>Just One Chart For Janet Yellen</strong></u></h2>
<p>This past week, Janet Yellen gave her semi-annual Humphrey-Hawkins testimony before Congress. During <a href="http://www.scribd.com/doc/256787323/20150224-mprfullreport">her testimony</a>, she made some very interesting statements overall but one really jumped out the most - <em>&quot;the economy is looking stronger.&quot;</em></p>
<p>I will agree that if you look only at the headline statistics of the unemployment rate or GDP it is certainly apparent that she is correct. However, in order for there to be a real recovery in the economy, which leads to higher demand, production, and consumption, there has to be employment gains beyond population growth in the 16-54-aged bracket.</p>
<p>The reason that I look at this group is that <strong>not only are they responsible</strong> for household formation and higher levels of consumption; but primarily because it strips out the argument of <em>&quot;retiring baby boomers.&quot; <span style="color: #005dab;">(<strong>Note:</strong> In truth, baby boomers aren&#39;t retiring either as those 55 and older that are employed is at their highest levels on record.) </span></em></p>
<p><em><a class="highslide ageent-ru" href="http://streettalklive.com/images/1dailyxchange/2015/Employment-16-54-020915.PNG" target="_blank" title="Employment-16-54-020915"><img alt="Employment-16-54-020915" class="i_want_img5" src="http://streettalklive.com/images/1dailyxchange/2015/Employment-16-54-020915.PNG" style="width: 600px; height: 377px;" /></a></em></p>
<p>Considering that the employment-to-population ratio of this age group is lower today than it was at the end of the financial crisis suggests that improvements in the labor market are not as robust as they appear.</p>
<p>The problem for Janet is that the monetary policy tool of lifting interest rates is a tool used to slow the rate of economic growth. With employment and wage growth weak, an economy that continues to churn along barely above 2% and an extremely overvalued range of assets; there may be much less room for the Fed to hike rates than currently believed.</p>
<p>&nbsp;</p>
<h2><u><strong>Economy Not As Strong As Yellen Thinks</strong></u></h2>
<p>Continuing with Yellen&#39;s commentary about a <em>&quot;strengthening economic recovery,&quot;</em> this is one thing that has yet to happen since the end of the financial crisis. <a href="http://streettalklive.com/index.php/blog.html?id=2622">As I discussed at length yesterday</a>:</p>
<blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>&quot;Furthermore, a look at the extended history of the economic composite index, and comparing it to both GDP and the Leading Economic Index for validation, paints a very interesting picture.<em style="font-style: italic; color: inherit;">(The gold dots represent the start and end of QE1, QE2, LTRO, and QE3)&nbsp;</em><strong>Since the financial crisis ended, the economic composite index has remained confined to levels that have historically been associated with recessions in the U.S. economy.</strong> This goes a long way to explaining the weak wage and economic growth that has persisted since 2009.&quot;</p>
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<p style="margin: 12px 0px; color: #444444; font-family: Arial,Helvetica,sans-serif; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 18px; text-align: start; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px; background-color: #ffffff;"><a class="highslide ageent-ru" href="http://streettalklive.com/images/1dailyxchange/2015/EOCI-1974-Prsent-LEI-022415-2.PNG" target="_blank" title="EOCI-1974-Prsent-LEI-022415-2"><img alt="EOCI-1974-Prsent-LEI-022415-2" class="i_want_img5" content="" src="http://streettalklive.com/images/1dailyxchange/2015/EOCI-1974-Prsent-LEI-022415-2.PNG" style="border: 2px solid silver; width: 600px; height: 395px;" /></a></p>
<p>The reason I bring this up, again, is because it clearly shows the <em>&quot;recovery/slowdown&quot;</em> cycle that has been reflective of the <em>&quot;range bound&quot;</em> economy over the last 5-years.&nbsp;</p>
<p>It also confirms the latest economic confidence poll from Gallup that showed confidence fell to an average of -2 for the week ending February 22nd. <a href="http://www.gallup.com/poll/181670/economic-confidence-index-back-negative-territory.aspx?utm_source=twitterbutton&amp;utm_medium=twitter&amp;utm_campaign=sharing">To wit:</a></p>
<blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>&quot;Gallup&#39;s U.S. Economic Confidence Index fell to an average of -2 for the week ending Feb. 22. This is the first time the index has had a negative weekly average since late December. Prior to that, the index had consistently been in negative territory since Gallup began tracking it daily in 2008.</p>
<p>&nbsp;</p>
<p>The Economic Confidence Index fell five points from the week prior, the largest drop since July. The weekly index numbers are usually fairly stable, not changing more than a couple of points unless there is some significant event.&quot;</p>
</blockquote>
<p>&nbsp;<a class="highslide ageent-ru" href="http://streettalklive.com/images/1dailyxchange/2015/Gallup-Confidence-Economic-022515.png" target="_blank" title="Gallup-Confidence-Economic-022515"><img alt="Gallup-Confidence-Economic-022515" class="i_want_img5" src="http://streettalklive.com/images/1dailyxchange/2015/Gallup-Confidence-Economic-022515.png" style="width: 599px; height: 371px;" /></a></p>
<p>The most interesting aspect is that while the economy is showing some signs of impact from falling oil prices, a port strike in California, weak global demand for exports and an exceptionally cold winter; the markets are pushing all-time highs. There is much hope being placed on the ECB&#39;s plans for launching QE in March, however, much remains to be seen as to just how effective it will be in a negative interest rate/deflationary enviroment.<strong> But then again...there is always <em>&quot;hope.&quot;</em></strong></p>
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http://www.zerohedge.com/news/2015-02-26/3-things-high-yield-warning-yellens-employment-economy#commentsBondBorrowing CostsCRECREDebt CeilingdefaultEurozoneFederal ReserveGallupHigh YieldJanet YellenLTROMonetary PolicyOklahomarecoveryTestimonyUnemploymentThu, 26 Feb 2015 20:37:12 +0000Tyler Durden502574 at http://www.zerohedge.comSubprime Car Loan Bubble 2.0 Full Frontalhttp://www.zerohedge.com/news/2015-02-21/subprime-car-loan-bubble-20-full-frontal
<p>With the total balance of auto loans for new and used vehicles approaching $1 trillion in the U.S., the folks at Experian want you to know that no matter what the numbers say, there’s no speculative bubble forming in the industry. Just ask Melinda Zabritski, the group’s director of automotive finance, who is quick to dismiss the growing chorus of Chicken Littles who are concerned about subprime auto lending: </p>
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<p>Whenever there is an uptick in the number of loans to subprime and deep subprime customers, there is the potential for a 'sky is falling' type of reaction, [but] the reality is we are looking at a remarkably stable automotive-loan market, in part because consumers are continuing to stay on top of their payments.</p>
</blockquote>
<p>That would be great if it were true. Of course the reality is that, according to the NY Times, <strong>early delinquencies (i.e. borrowers who have missed a payment within 8 months of origination) are at their highest level since 2008:</strong></p>
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<p>More than 2.6% of car-loan borrowers who took out loans in the first quarter of last year had missed at least one monthly payment by November, the highest level of early loan trouble since 2008 [and] more than 8.4% of borrowers with weak credit scores who took out loans in the first quarter of 2014 had missed payments by November [also] the highest level since 2008, when early delinquencies for subprime borrowers rose above 9%.</p>
</blockquote>
<p>Combine that with the fact that the percentage of total auto loan originations made to subprime borrowers surged to 27% in 2013 (the highest level since 2006), the same year that 1.1 million U.S. households took out auto title loans (i.e. the new home equity loan), and you’ve got a rather strong argument for the contention that anything we learned in 2008 about the perils of loose lending standards has now been completely forgotten. </p>
<p>Reinforcing this point is Wells Fargo, who notes that <strong>things are now officially back to “normal,” where “normal” is amusingly defined by the conditions that prevailed in 2006: </strong></p>
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<p>Lending standards for households and corporations have eased to the extent that they resemble the last “normal” period of lending seen in 2006. Credit has expanded rapidly in some loan categories, which has in turn boosted spending and investment. </p>
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<p>Of course the bad news is that Americans are again overextended at just the wrong time: </p>
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<p>...should interest rates rise later this year, <strong>some households and corporations may find themselves overleveraged as interest rates and borrowing costs rise.</strong> When looking at interest rate sensitivity by loan product, we see that auto loans rates are the most sensitive to changes in the fed funds target rate. In addition, we can see that for each one-percentage point rise in the fed funds rate, the interest rate on a 48-month new car loan rises 0.61 percentage points.</p>
</blockquote>
<p>The prudent thing to do, from a lender’s perspective, is to tighten standards when it appears borrowers are exhibiting a propensity to take on an undue amount of risk. Instead, standards are actually falling as risk-taking increases: </p>
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<p>Although firms continue to ease lending standards, they have perceived increased risk among some loan types.</p>
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<p>And, not surprisingly, recklessness is most prevalent in the two categories that have combined to underpin consumer credit growth post-crisis: </p>
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<p>Among retail loans, student and auto loans saw the largest increase in 2014, as more than 40 percent of firms reported increased risk.</p>
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<p>Most disturbing of all, lenders seem to have reverted to their pre-crisis mindset: “If we can sell the loan, who cares about the creditworthiness of the borrower?” </p>
<p>In 2014, a third of all firms originated retail loans with the intent to sell or hold the loan (as opposed to the sole intention to hold the loan). This trend indicates that some firms could be extending loans that they consider less creditworthy and could be eager to get these higher-risk loans off of their balance sheets.</p>
<p><a href="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/02/subprime%20bubble%201.png"><img src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/02/subprime%20bubble%201.png" width="445" height="355" /></a></p>
<p>As a reminder, ABS issuance hit its highest level since the crisis last year with student and auto loans accounting for the lion’s share. That's no coincidence.</p>
<p><a href="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/02/subprime%20bubble%202.png"><img src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/02/subprime%20bubble%202_0.png" width="441" height="310" /></a></p>
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http://www.zerohedge.com/news/2015-02-21/subprime-car-loan-bubble-20-full-frontal#commentsBorrowing CostsConsumer CreditFed Funds TargetHome EquityRealityWells FargoSun, 22 Feb 2015 00:14:45 +0000Tyler Durden502314 at http://www.zerohedge.comThere's No Way Out Now: "That Choice Was Yours"http://www.zerohedge.com/news/2015-02-21/theres-no-way-out-now-choice-was-yours
<p><a href="http://www.firstrebuttal.com/2015/02/20/and-i-didnt-even-mention-greece-the-end-of-the-euro-or-evil-russia-yikes/"><em>Submitted by Thad Beversdorf via FirstRebuttal.com</em></a>,</p>
<p><u><strong>This is a screen shot from my iPhone about a week ago. &nbsp;And really this says it all.</strong></u></p>
<p>&nbsp;</p>
<div class="entry-content">
<p><a href="http://www.firstrebuttal.com/wp-content/uploads/2015/02/IMG_0061.png"><img alt="IMG_0061" class="alignnone size-full wp-image-1578" height="640" src="http://www.firstrebuttal.com/wp-content/uploads/2015/02/IMG_0061.png" width="360" /></a></p>
<p>&nbsp;</p>
<p><strong>Breaking news is highlighting the all time highs again while the underlying economic news is negative across the board.</strong> &nbsp;No other time in history could the economy be in such dire straits and have the market completely apathetic to it. &nbsp;Whether it&rsquo;s total debt, Consumer debt, retail sales, housing, productivity, inventories, full time jobs, GDP, wages, just about any indicator it is negative.</p>
<p>And if we put it in the context of having such extreme monetary policies with the sole intent&nbsp;toward all of these moving in a highly positive direction the above indications&nbsp;aren&rsquo;t just terrible they are frightening. &nbsp;It&rsquo;s kind of like when you&rsquo;re in a fight and you&rsquo;ve just hit the other guy&nbsp;with your best punch and he doesn&rsquo;t flinch. &nbsp;You start to think this ain&rsquo;t&nbsp;going to end very well. &nbsp;<strong>I expect the Fed folks are suffering from a case of the &lsquo;oh shit that was the best I got&rsquo; syndrome.</strong></p>
<p>Our nation&rsquo;s &lsquo;best and brightest&rsquo; economists and financial &lsquo;experts&rsquo; have created policies that are their best ideas to generate economic growth and these policies have failed completely. &nbsp;<strong>The only thing preventing this nation from a full on collapse is an all time high stock market. &nbsp;And that is the only reason the market is at all time highs. &nbsp;&nbsp;Volume is sparse, institutional money is on the sidelines and every damn metric you can think of is falling apart yet markets are at all time highs, thanks to the Fed.</strong></p>
<p>Remember we had a 10% sell off over the course of about 8 trading days in October. &nbsp;The Fed stepped in and stated that QE4 was cocked and ready. &nbsp;That reminded investors the&nbsp;market is risk free and with that it once again moved on to new highs. &nbsp;Now understand, this is in the face of 12% unemployment, a dead housing market, declining real retail sales, negative real GDP when adjusted for debt and a middle class that is now&nbsp;completely reliant on consumer debt for basic survival.</p>
<p><strong>You can look to things like real wages and real median income to see if the American consumer, always the bulk of GDP and really the only measure of GDP that should be of concern, is healthy or not. </strong>&nbsp;And the data shows us the American consumer has slightly more real income than they did in 1985 (7% more). &nbsp;They have lost 10% of their income since 2000. &nbsp;They have also taken on 150% more debt to compensate for the loss of income during that period. &nbsp;The obvious implication is that the typical American&rsquo;s real free cash flow has diminished significantly. &nbsp;<strong>Yet somehow the market expects future corporate free cash flows to grow forever without the existence of the American consumer driving them? &nbsp;I just don&rsquo;t get it. &nbsp;Where does the money come from??</strong></p>
<p><strong>For the past three years corporate earnings have been growing by way of contraction.</strong> &nbsp;Revs &ndash; Costs = Earnings. &nbsp;Reduce costs and earnings will grow. &nbsp;However the obvious conundrum is that costs are limited and thus cost cutting is not a sustainable growth strategy. &nbsp;We do it when we have nothing left to show growth. &nbsp;Share buy backs and cuts to production have been the only reason earnings have been positive. &nbsp;This was true in 2006 and 2007, and by 2008 the cash-flow from cost cutting ran out. &nbsp;I dare say we are entering that phase now and should expect to see a significant slow down in earnings growth despite the fanciest of fancy accounting.</p>
<p><strong>If&nbsp;you have even a slice of common sense you understand that debt being used for consumption is not the sign of economic or financial strength, money pulled away from&nbsp;capex isn&rsquo;t income and earnings growth by way of cost cutting is not sustainable.</strong> &nbsp;So be careful when listening to the bank analysts so willing to get on television to tout American economic prowess and divert attention away from things that portray the real story. &nbsp;They get paid to cheerlead. &nbsp;Seriously it is in the job description. &nbsp;Ok maybe not the short skirt and pom pons but the cheer is in there!</p>
<p>In fact, in an onslaught of research Brian Belski of BMO sent me, produced by his team of analysts, not once did they discuss revenues in their medium and long term market forecasts. &nbsp;Revenue is the one item that every business in the world cannot exist without. &nbsp;It is actually the only item that all businesses would fail without. &nbsp;Yet in all of the research provided by Belski&nbsp;not once did his team discuss revenues. &nbsp;The reason is simple. &nbsp;It would contradict the story he is paid to sell.</p>
<p>Any reasonable and impartial analyst forecasting the future performance of the market will certainly discuss sales or something that relates to the existence and position of a&nbsp;consumer. &nbsp;In fact, Morningstar&rsquo;s key measure is wherewithal of future cash flows, meaning they put a significant amount of focus on stability of future sales. &nbsp;But not BMO, they suggest a capex resurgence, that has nothing to do with growth in sales, will be the great saviour. &nbsp;Odd given demand growth as measured via sales is the&nbsp;only reason a firm will expand&nbsp;capacity.</p>
<p><strong>The reality is that America&rsquo;s economy and thus America&rsquo;s bottom 80% has been at best flat for 6 years and is now actually sliding backwards despite the vast amount of money being injected.</strong> &nbsp;Even according to the Fed&rsquo;s own reports, <strong>we have yet to see 3% annual growth in GDP </strong>since 2007. &nbsp;And that figure includes all of the growth in consumer credit. &nbsp;Take out the consumer credit, which we know cannot count as growth as it has a negative net effect, and the reality of negative GDP sets in. &nbsp;<u><strong>That is udder failure! &nbsp;Don&rsquo;t tell me next year again. &nbsp; You folks at the Fed have absolutely failed! &nbsp;Who gets 6 or 7 or 8 years of burning through trillions of dollars with no results??? &nbsp;Who gets&nbsp;that?? &nbsp;Come on give me a f#cking break already!! &nbsp;YOU HAVE FAILED! PERIOD! &nbsp;YOU&rsquo;RE FIRED! &nbsp;GET OUT!</strong></u></p>
<p>Those are the words that every American in the bottom 80% would receive if their performance was as poor in their respective jobs, should they be lucky enough to have one. &nbsp;It absolutely boggles my mind that these arrogant fools who have so clearly made every wrong choice available to them still walk around and talk as though we are to believe they know anything about anything. &nbsp;Who are these clowns and what world do they live in?? &nbsp;Is there absolutely zero accountability anywhere in our nation&rsquo;s leadership??</p>
<p><strong>What could possibly change next year that hasn&rsquo;t changed after 6 years? &nbsp;What input has a 6 year lag?</strong> &nbsp;These are the common sense questions that nobody seems to be asking. &nbsp;If these clowns are seriously just going to say next year then give me an explanation of why it hasn&rsquo;t happened despite their calls each year that next year will be the year. &nbsp;And why this year&rsquo;s call of next year is different? &nbsp;What is the lag effect that hasn&rsquo;t yet come to fruition that we are now expecting to hit? &nbsp;Housing??</p>
<p><strong>People are beginning to realize housing is not going to be the saviour.</strong> &nbsp;In fact, we almost don&rsquo;t hear about housing anymore. &nbsp;But for years after the great credit crash, housing was touted as being the thing that will pull us out of recession. &nbsp;I have been very clear that the housing effect is dead. &nbsp;So not only is the expansion of jobs in the construction sector improbable but the wealth effect of home ownership too is dead. &nbsp;Subsequent to 2008, the typical home owner simply doesn&rsquo;t see home equity as stable enough to live against because surprise surprise house prices do decline.</p>
<p><a href="http://www.firstrebuttal.com/wp-content/uploads/2015/02/Screen-Shot-2015-02-19-at-9.55.37-PM.png"><img alt="Screen Shot 2015-02-19 at 9.55.37 PM" class="alignnone size-full wp-image-1579" src="http://www.firstrebuttal.com/wp-content/uploads/2015/02/Screen-Shot-2015-02-19-at-9.55.37-PM.png" style="width: 600px; height: 399px;" /></a></p>
<p>The above chart tells us that housing, now higher than its been in 6 years has only made it back to the historic lows. &nbsp;And with home loans more difficult than ever to obtain this is not going to change anytime in the near future. &nbsp;<strong>So we can write off housing as the catalyst for true economic growth.</strong></p>
<p>So then what is it that will pull us out of the economic doldrums in which we&rsquo;ve experienced for so many years now? &nbsp;Well as discussed above, BMO Capital Markets believes a resurgence in capex will be the answer. &nbsp;Driven by weakening emerging markets and a behavioral change in the American consumer to a move away from cheap products into more expensive products that are produced closer to home, BMO is predicting capex will surge and with it will lift America.</p>
<p><strong>And while I agree with the premise that capex is a very important part of turning the economy around I fail to see a catalyst for a resurgence in capex.</strong> &nbsp;You see capex correlates highly to revenues, not earnings. &nbsp;The reason is that revenues correlate significantly to demand. &nbsp;When revenues are growing it is a signal that demand is growing requiring more capacity. &nbsp;More capacity&nbsp;means capital expenditures. &nbsp;There is nothing outside of strong demand&nbsp;that drives capex on a large scale. &nbsp;Tax incentives can push capex forward but not often and not on a large scale. &nbsp;The continuing decline in capital expenditures is proof that demand is not strong for the two states do not coexist. &nbsp;<strong>In fact, capacity utilization is the lowest it&rsquo;s been in decades despite declining capacity which all else equal should increase capacity utilization, which tells us that everything is not equal. &nbsp;Utilization has declined faster than capacity!</strong></p>
<p><a href="http://www.firstrebuttal.com/wp-content/uploads/2015/02/Screen-Shot-2015-02-20-at-12.51.38-AM.png"><img alt="Screen Shot 2015-02-20 at 12.51.38 AM" class="alignnone size-full wp-image-1582" src="http://www.firstrebuttal.com/wp-content/uploads/2015/02/Screen-Shot-2015-02-20-at-12.51.38-AM.png" style="width: 600px; height: 398px;" /></a></p>
<p><strong>The chart depicts degrading efficiency in capital assets over time.</strong> &nbsp;While companies have streamlined the workforce they are still in process of streamlining capital assets. &nbsp;This should continue as the average capacity utilization before 2000 was around 85% and currently we are just inching back to around 80%. &nbsp;The interesting thing about this that absolutely nobody on television dares to mention is that capex is the basis for a trickle down recovery. &nbsp;That is, make borrowing costs relatively very cheap and corporations will use that low cost period to increase capex because it lowers&nbsp;the break-even for a given project and thus increases return on capital. &nbsp;And ROC growth equates to big bonuses for C-suite executives.</p>
<p>But why didn&rsquo;t C- suite executives take advantage of low cost capex? &nbsp;Well you can thank both fiscal and monetary policies for destroying corporate capital expenditures. <strong>&nbsp;As a CEO you must allocate your cash to maximize shareholder value.</strong> &nbsp;And when the US has implemented a fiscal policy with&nbsp;the highest G20 corporate tax rate it means the break-even is higher than every other developed&nbsp;nation. &nbsp;And so when demand is weak there is no reason to invest in capex unless costs are relatively very low, which the tax has ensured is not the case.</p>
<p>From a monetary perspective, borrowing costs are extremely low and corporations are borrowing to take advantage of the cheap cash. &nbsp;However, the Fed has guaranteed an upward moving stock market. <strong>&nbsp;And so the CEO is required to maximize shareholder value and thus must take the lower risk, higher return investment, which is most certainly the stock market over a high cost, high risk consumer market. </strong>&nbsp;Essentially between fiscal and monetary policy there is no way the CEO can in good conscience build out capacity.</p>
<p>So housing and capex are off the list&nbsp;as a growth function for the economy.<strong> &nbsp;How about jobs? &nbsp;</strong>Well according to the mainstream media, the Fed and the government, unemployment is down to 5.7%, which is historically pretty good. &nbsp;But then why the lack of economic or wage growth? &nbsp;This too is pretty basic stuff. &nbsp;If we look to the U6 unemployment figure we see unemployment and underemployment remains well into the double digits at 12%. &nbsp;This is certainly improved from the 2009 17% print but it is still higher than at any point between 2000 and 2008.</p>
<p>So despite all the calls of a radiant job market the reality is much more grim. &nbsp;Again, the proof is in the pudding. <strong>&nbsp;If the job market was so very strong, wages and median incomes would see material increases. &nbsp;That is just the law of supply and demand for labour. &nbsp;Because we actually see weakening wages and incomes it tells us there is increasing slack in the job market.</strong></p>
<p><strong><u>And so housing, capex and jobs then are off the list as&nbsp;potential growth drivers.</u></strong> &nbsp; Essentially we&rsquo;ve just determined that we won&rsquo;t have a wealth effect, a supply side or a demand side recovery. &nbsp;Outside of that I&rsquo;m not sure what type of recovery exists. &nbsp;I suppose a central banking recovery or at least that&rsquo;s what the Fed is telling us. &nbsp;But 6 years on and we are still waiting for all that wealth, created by the Fed&rsquo;s trickle down policies, to actually trickle down.</p>
<p><strong>Instead the cheap money has been used to compliment the corporate layoffs with share buybacks. &nbsp;</strong>Money saved from layoffs and from 0% loans go to share buybacks, which actually take money outside of the economy and into secondary markets that have no positive impact on the economy. &nbsp;But it has created immense unearned wealth to .1% of the population. &nbsp;Just so happens that the same folks holding onto these policies are part of that .1%. &nbsp;<strong>All starting to make a bit of sense now??</strong></p>
<p>Now none of this is earth shattering. &nbsp;I&rsquo;m certain most, when really focused on such things, understand that jobs, capacity expansion and housing are all in pretty bad shape. <strong>&nbsp;Yet we allow these central bankers to simply continue the same policies. </strong>&nbsp;It is imperative for the typical American consumer to understand that the Fed will carry on with these policies until it all collapses. &nbsp;It&rsquo;s exactly what they did in the lead up to the 2008 debacle. &nbsp;They deny there are any existing problems that are not being overcome by their intellectual wizardry.</p>
<p><iframe allowfullscreen="" frameborder="0" height="360" src="https://www.youtube.com/embed/INmqvibv4UU" width="480"></iframe></p>
<p style="text-align: left;">&nbsp;</p>
<p style="text-align: left;">And the pundits laughed anytime cooler heads attempted to speak the truth about the coming collapse.</p>
<p style="text-align: left;"><iframe allowfullscreen="" frameborder="0" height="360" src="https://www.youtube.com/embed/CZyvnWFbR84" width="480"></iframe></p>
<p style="text-align: left;"><strong>My point to all of this is while the overwhelming message continues to be everything is strong and the future is absolutely as bright as ever, as measured by the all time high markets, the facts and the data clearly tell a different story. &nbsp;</strong>What the videos remind us is that the pundits will always tout the &lsquo;everything is great&rsquo; story until it is too late. &nbsp;They laugh and ostracize anyone who attempts to rock the boat with a message of reality. &nbsp;And they do it to deter others from delivering such a message.</p>
<p style="text-align: left;"><strong>That message is that there exists no catalyst mechanism to pull us out of this economic slumber.</strong> &nbsp;If you listen carefully to the pundits they never actually state a&nbsp;way out. &nbsp;They state the fundamentals are very strong but they never point to any specific fundamentals because there aren&rsquo;t any strong fundamentals. &nbsp;And so here we go again with analysts touting strong fundamentals, pundits vehemently calling for economic growth and yet we haven&rsquo;t seen any of it. &nbsp;Year after year after year we accept their story and the whole time the typical American gets poorer (median net worth is down 40% since 2007) while the top .1% is getting richer and richer.</p>
<p style="text-align: left;"><strong>Inevitably this all time high market overvaluation will blow up the same as last time despite the pundits laughing at such predictions. </strong>&nbsp;There is no escaping it and the real shit of it is that more retail cash is in the market than in 2007. &nbsp;Because net worth is down 40% that means a much higher total percentage of total household wealth is going to be lost in this next crash. &nbsp;The devastation will be more than most folks can sustain and the government will again look to reimburse the banks rather than the citizens. &nbsp;So you can listen to and laugh along with the &lsquo;all knowing&rsquo; pundits or you can take heed of history and protect yourself now. &nbsp;<strong>But do remember the choice was&nbsp;yours. &nbsp;You will have nobody to blame but yourself when and if it all comes tumbling down and you were too busy laughing.</strong></p>
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http://www.zerohedge.com/news/2015-02-21/theres-no-way-out-now-choice-was-yours#commentsBorrowing CostsCapital ExpendituresCapital MarketsConsumer CreditFailHome EquityHousing MarketMonetary PolicyMorningstarNoneRealityRecessionrecoveryUnemploymentSat, 21 Feb 2015 18:30:28 +0000Tyler Durden502300 at http://www.zerohedge.comHow Many More "Saves" Are Left In The Central Bank Bazookas?http://www.zerohedge.com/news/2015-02-19/how-many-more-saves-are-left-central-bank-bazookas
<p><a href="http://www.peakprosperity.com/blog/91747/how-many-more-%E2%80%9Csaves%E2%80%9D-left-central-bank-bazookas"><em>Submitted by Charles Hugh-Smith via Peak Prosperity</em></a>,</p>
<div class="content clearfix">
<p><strong>The master narrative of the global economy shifted six years ago from &ldquo;China will push global growth for decades to come&rdquo; to &ldquo;the central banks can push global growth for decades to come.&rdquo;</strong></p>
<p>Time after time we&rsquo;ve witnessed enfeebled global markets jolted out of terminal declines by central bank pronouncements and new money-printing policies. Never mind that the European Central Bank&rsquo;s (ECB) Mario Draghi had no concrete proposals in hand when he announced the ECB would &ldquo;do whatever it takes&rdquo; to save the European Union from the financial consequences of its reckless abandonment of risk management; the mere announcement was enough to trigger a massive reversal in global markets.</p>
<p>The major central banks have tag-teamed one rally in global stock and bond markets after another: the U.S. Federal Reserve goosed markets in 2008, 2009, 2010, 2011, 2012 and 2013, only ending its various quantitative easing (QE) money-emitting programs in late 2014.</p>
<p>The ECB saved the day with Draghi&rsquo;s &ldquo;whatever it takes&rdquo; PR gambit and more recently with its own QE money-printing program.</p>
<p>The Bank of Japan (BOJ) injected monetary <em>amphetamines</em> into global markets with Abenomics, a last-ditch effort by the BoJ and the government of Japan to crush the value of the Japanese yen and import inflation.</p>
<p>The People&rsquo;s Bank of China (China&rsquo;s central bank) has kept the credit spigot open wide for years, unleashing one of the greatest credit expansions in recent history.</p>
<p>China&rsquo;s central bank balance sheet has doubled since 2009, but the star attraction in China&rsquo;s debt bubble is bank credit. Compare China&rsquo;s bank credit with that of the U.S.. Measured in dollars, the U.S. GDP is $17 trillion and China&rsquo;s GDP is $10 trillion; measured in purchasing power parity (PPP), the two economies are roughly the same size.</p>
<p class="rtecenter"><img alt="" src="http://media.PeakProsperity.com/images/china-us-bank-assets.jpg" style="height: 457px; width: 600px;" /></p>
<p class="rtecenter"><a href="http://knoema.com/nwnfkne/world-gdp-ranking-2014-data-and-charts" target="_blank">Source</a></p>
<p>The remarkable success of grandiose pronouncements, money-printing programs and serial expansions of credit raises a key question: how many more &ldquo;saves&rdquo; can the central bank bazookas fire that will have the desired effects of maintaining perceptions of central bank omnipotence and pushing global markets ever higher?</p>
<p>The Dow Jones Global Index (DJW) offers a snapshot of global markets. Since the last big central bank &ldquo;save&rdquo; in 2012, the index has lofted ever higher, staying comfortably above the 50-week moving average (MA).</p>
<p class="rtecenter"><img alt="" src="http://media.PeakProsperity.com/images/chs-2-20-15-chart1.jpg" style="height: 547px; width: 600px;" /></p>
<p>But this era of central bank-induced euphoria appears to have ended in mid-2014; since then, price and key indicators have trended down. Recently, price has slipped beneath the 50-week MA and is struggling to overcome this line that was once support and is now resistance.</p>
<p>Though central banks have continued their ceaseless public-relations campaigns and kept various credit and money spigots wide open, this chart strongly suggests the central bank bazookas are losing their effectiveness. Iin other words, the returns on both PR and money/credit issuance are diminishing rapidly.</p>
<p>These <em>diminishing returns</em> may result at least partially from the end of the Federal Reserve&rsquo;s massive monetary/credit expansion, which is reflected by the Fed&rsquo;s balance sheet (courtesy of Davefairtex/mdbriefing.com):</p>
<p class="rtecenter"><img alt="" src="http://media.PeakProsperity.com/images/chs-2-20-15-chart2.jpg" style="height: 475px; width: 600px;" /></p>
<p>After quintupling from $871 billion in 2008 to $4.5 trillion, the balance sheet has leveled off as the Fed ended its QE program.</p>
<p>Other central banks have kept their money-printing/credit spigots wide open, but it&#39;s looking like the Fed&rsquo;s decision to end large-scale money-issuance of U.S. dollars into the global economy cannot be replaced with euros, yen and renminbi (a.k.a. yuan).</p>
<h2><u>Saved by Cheaper Energy?</u></h2>
<p>The astonishing collapse in oil prices has provided an unexpected (by most analysts) tailwind to the world&rsquo;s manufacturing/consuming economies, even as it has dealt a crushing hammer-blow to oil-producing/exporting economies.</p>
<p>While there are obvious pluses and minuses to the cost of oil falling in half (when priced in U.S. dollars), the fact is that the major manufacturing/consuming nations have far larger economies than the oil producing/exporting nations (the one exception being the U.S., which is both a major producer and major importer of oil). So the advantages of lower oil prices for manufacturing, transportation and end consumers on a global basis outweighs the damage to the energy sector globally, which is roughly 5% to 10% of global GDP, depending on the current prices of energy:</p>
<p class="rtecenter"><img alt="" src="http://media.PeakProsperity.com/images/chs-2-20-15-chart3.jpg" style="height: 454px; width: 600px;" /></p>
<p>Though many mainstream media sources are claiming oil will decline to $30 or even lower, and stay there for years, others are skeptical of this &ldquo;cheap oil forever&rdquo; projection based on the rising cost of extracting oil globally. Since the majority of the cheap-to-extract oil has already been pumped, what&rsquo;s left costs more to extract when measured in energy (energy returned on energy invested&mdash;EROEI) or money.</p>
<p>Since oil is priced on the margin, relatively modest changes in supply and demand can move prices far more than many expect.&nbsp; The recent uptick visible in this chart suggests those expecting oil to drop to $30/barrel and stay there indefinitely might well be as wrong as those who thought oil would hover around a permanently high plateau around $90 - $100 last summer.</p>
<p>While the tailwind of lower energy costs has been welcomed in most of the world, the economics of oil do not lend much support to the expectation of $30/barrel oil lasting indefinitely. Lower prices will eventually cause producers to shut-in wells, rapidly reducing supply, while rising consumption in oil-exporting nations will continue to reduce the quantity of oil available for export.</p>
<p>In other words, it&rsquo;s not just the quantity of oil that&rsquo;s being produced globally that counts&mdash;it&rsquo;s the quantity that&rsquo;s available for export that really matters.</p>
<p>The tailwinds of lower energy prices might be as ephemeral as the tailwinds of hot air (PR pronouncements of the &ldquo;whatever it takes&rdquo; variety) issued by central banks.</p>
<h2><u>The Destabilizing Rise of the U.S. Dollar</u></h2>
<p>Just as the collapse in oil prices was not controllable by central bank jawboning or emissions of money/credit, it appears the strengthening of the U.S. dollar&mdash;a move that has destabilized emerging market economies and currencies&mdash;is not entirely in the control of central banks:</p>
<p class="rtecenter"><img alt="" src="http://media.PeakProsperity.com/images/chs-2-20-15-chart4.jpg" style="height: 454px; width: 600px;" /></p>
<p>I have covered the dynamics of this destabilization in several prior articles over the past several months, including <a href="http://www.peakprosperity.com/blog/86923/dollar-may-remain-strong-longer-we-think" target="_blank">The Dollar May Remain Strong For Longer Than We Think</a> and <a href="http://www.peakprosperity.com/blog/88728/consequences-strengthening-us-dollar" target="_blank">The Consequences Of A Strengthening US Dollar</a>.</p>
<p>In essence, <em>carry trades</em> (i.e. borrowing in one currency and investing the proceeds in another currency) that were profitable when the dollar was weakening have reversed, turning into losing trades.</p>
<p>The more the dollar rises, the greater the losses in these carry trades, and the greater the incentive for those still in the trade to sell emerging market assets and currencies.</p>
<p>The flood of dollars unleashed by the Fed&rsquo;s QE programs washed over the entire globe, encouraging people in emerging markets to take loans denominated in dollars. Now those loans are increasingly burdensome, as it takes ever-larger sums of local currency to service the dollar-denominated debts.</p>
<p>In response to these massive outflows of capital, emerging nations must raise interest rates to offer incentives for capital to stay put, which then causes the cost of new loans (and doing business in general) to quickly rise to painful levels.</p>
<p>As the currencies suffering outflows decline against the dollar, imports become more expensive and exports lose value when traded for dollars. It&rsquo;s a triple-whammy for emerging nations: their borrowing costs are soaring, the capital leaving to pay off dollar-denominate debt leaves them starved for investment capital, and their imports rise in cost as their exports earn less.</p>
<p>As I have often noted, the failure to address the structural problems that caused the Global Financial Meltdown of 2008-2009 effectively transferred systemic risk to the enormous foreign-exchange (FX) market, which is connected to virtually everything in the global economy.</p>
<p><strong>This is one key reason for the diminishing returns of central bank policies: all central banks have succeeded in doing is pushing the systemic risk into an arena they do not control.</strong></p>
<p>In <a href="http://www.peakprosperity.com/insider/91748/what-will-happen-next-us-dollar" target="_blank">Part 2: What Will Happen Next For The US Dollar</a>&nbsp;we explore just how far the destabilizing effects of currently in play in the currency markets -- currency wars, Triffin&#39;s Paradox, increased FX volatility -- are likely to threaten the global economy. It&#39;s very important to appreciate how the consequences of such global destabilization are not as controllable as relatively stable stagnation we have become used to over the past several decades.</p>
<p><strong>In short, buckle up.</strong></p>
<p><a href="http://www.peakprosperity.com/insider/91748/what-will-happen-next-us-dollar" target="_blank">Click here to access Part 2</a> of this report <em>(free executive summary; <a href="http://www.peakprosperity.com/enroll" target="_blank">enrollment </a>required for full access)</em></p>
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http://www.zerohedge.com/news/2015-02-19/how-many-more-saves-are-left-central-bank-bazookas#commentsAbenomicsBank of JapanBondBorrowing CostsCentral BanksChinaEuropean Central BankEuropean UnionFederal ReserveGlobal EconomyJapanMeltdownPurchasing PowerQuantitative EasingRenminbiRisk ManagementVolatilityYenYuanThu, 19 Feb 2015 23:30:58 +0000Tyler Durden502199 at http://www.zerohedge.comGreek Game Theory: "The Risk Of A Negative Outcome Is Higher Than The Market Thinks"http://www.zerohedge.com/news/2015-02-12/greek-game-theory-risk-negative-outcome-higher-market-thinks
<p><em><a href="http://www.confluenceinvestment.com/">Submitted by Bill O&#39;Grady of Confluence Investment Management </a>(<a href="http://www.valuewalk.com/2015/02/greece-game-theory/">via Valuewalk</a>),</em></p>
<p>After the Syriza party won 149 of the 300 seats in the Jan. 24th Greek elections, European markets have been roiled by worries over another crisis developing. The party has engaged in some provocative behaviors; its leader and Greece&rsquo;s new prime minister, Alexis Tsipras, decided that his first official visit would be to a monument that honored Greek citizens who suffered a mass execution at the hands of the Nazis. That symbolism wasn&rsquo;t lost on anyone. Tsipras, and his new finance minister, Yanis Varoufakis, have indicated that they have no interest in fulfilling the bailout requirements of the European Central Bank (ECB), the European Union (EU) and the International Monetary Fund (IMF), the &ldquo;troika&rdquo; that has managed the bailout for Greece.</p>
<p>Austerity has severely harmed Greece&rsquo;s economy, cutting its GDP by 26% from the pre-crisis peak. The unemployment rate is 26% and youth unemployment is over 50%. The election of Syriza is a reaction against the economic depression that Greece has endured as Syriza ran on an anti-austerity platform.</p>
<p><strong>Of course, one nation&rsquo;s austerity is another nation&rsquo;s reform. </strong>The German position, which has become the establishment position in Europe,1 is that excessive Greek fiscal spending and borrowing is responsible for the problems in Greece. This excessive spending and borrowing is seen as leading to rampant corruption, gold-plated salaries and benefits for government employees and economic inefficiency. Only reforms, or austerity, can bring Greece any hope of recovery.</p>
<p>The Greek and anti-establishment position is that Germany is the cause of not just Greece&rsquo;s economic collapse, but the economic crisis in the Eurozone periphery.</p>
<p><a href="http://www.valuewalk.com/wp-content/uploads/2015/02/Greece-Greek-Games-1.jpg"><img alt="Greece Greek Games " class="aligncenter size-full wp-image-521586 disappear appear" src="http://www.valuewalk.com/wp-content/uploads/2015/02/Greece-Greek-Games-1.jpg" style="width: 600px; height: 453px;" /></a></p>
<p><em>This chart shows German exports as a percent of GDP. Prior to reunification, exports generally represented around 23% of German GDP.</em></p>
<p>Exports rose as the German government changed policy following reunification and have moved steadily higher since the euro was formally introduced in 2000, now representing over 45% of Germany&rsquo;s GDP.</p>
<p>Germany engaged in policies after reunification that were designed to reduce labor costs, improve productivity and build saving. These policies made the German economy overly dependent on exports that were mostly sold within the Eurozone, which for Germany is a single-currency free trade zone.</p>
<p>In order to sell these exports to the rest of Europe, German banks engaged in a sort of &ldquo;vendor finance,&rdquo; where German banks and investors bought the debt from the periphery who then purchased German exports. Of course, this problem was exacerbated by the use of a common currency and the perception among investors that the bonds of individual countries in the Eurozone were, somehow, mutualized. In other words, no country would default because the Eurozone was unified. Thus, borrowing costs fell to northern European levels in the periphery which spurred even more consumption in the southern regions of the Eurozone. Of course, we now know the debts were not mutualized and that the Eurozone has serious unresolved issues.</p>
<p><strong>In this report, we are going to use game theory to describe the situation between Greece and the EU/Germany/ECB. </strong>This method shows how misunderstandings can develop and how catastrophic mistakes are made. Using this structure, we will outline the positions and perceptions of both sides and describe how this situation could lead to another crisis. As always, we will finish with market ramifications.</p>
<h3><u>Game Theory</u></h3>
<p>Game Theory was developed after WWII and was used by analysts to predict behaviors between a limited number of players. In economics, it is often used to describe the interplay between firms in an oligopoly. In defense analysis, it was used heavily to create the rules of the road between the U.S. and the U.S.S.R. The concept of &ldquo;mutually assured destruction,&rdquo; or MAD, came out of game theory.</p>
<p>The canonical game in Game Theory is Prisoner&rsquo;s Dilemma. It describes a situation in which two players, acting in a rational fashion, end up with a less than optimal outcome.</p>
<p><a href="http://www.valuewalk.com/wp-content/uploads/2015/02/Greece-Greek-Games-2.jpg"><img alt="Greece Greek Games " class="aligncenter size-full wp-image-521587 disappear appear" src="http://www.valuewalk.com/wp-content/uploads/2015/02/Greece-Greek-Games-2.jpg" style="width: 600px; height: 254px;" /></a></p>
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<p>Game theorists have created iterative tournaments to observe how players behave in multiple rounds. A number of interesting outcomes have developed; in general, the best strategy is &ldquo;tit-for-tat,&rdquo; which is to be quiet until someone rats then always rat with that particular player. They have also noticed that &ldquo;nice&rdquo; players tend to congregate with each other and group-punish defectors. In a single play without collusion, we expect the Rat/Rat outcome. In economics, when that outcome isn&rsquo;t observed, regulators often fear that collusion has occurred which often leads to antitrust violations under U.S. law. At the same time, prisoner&rsquo;s dilemma undermines the idea that economic actors, operating under conditions of self-interest, will always arrive at the most optimal solution. The prisoner&rsquo;s dilemma game suggests that under conditions of imperfect competition, a less than optimal outcome is likely if participants follow self-interested behaviors.</p>
<p>Another canonical game is chicken.</p>
<p><a href="http://www.valuewalk.com/wp-content/uploads/2015/02/Greece-Greek-Games-3.jpg"><img alt="Greece Greek Games " class="aligncenter size-full wp-image-521588 disappear appear" src="http://www.valuewalk.com/wp-content/uploads/2015/02/Greece-Greek-Games-3.jpg" style="width: 599px; height: 223px;" /></a></p>
<p>If both veer, both suffer some loss of face. If one veers and the other doesn&rsquo;t, the holding player wins. If both hold, they suffer severe damage.</p>
<p>This game assumes that the losses are symmetric. The MAD concept assumes a game of chicken, in which Veer becomes No Attack and Hold becomes Attack. If both attack, the world ends. If the losses become asymmetric, then one of the players who perceives that his relative loss is less may consider a hold position. That is why, in MAD, treaties were put in place to prevent the creation of missile defense systems for fear it would make one of the parties believe that their losses in an Attack/Attack outcome would be survivable and thus encourage war. As long as both parties believe that complete destruction is the most likely result, neither would attack. In effect, if both players can create rituals that minimize the costs of &ldquo;loss of face,&rdquo; a chicken game can be repeated.</p>
<h3><u>Greece, the EU/Germany/ECB and Chicken</u></h3>
<p>We believe that Greece and the Eurozone are effectively engaged in a game of chicken. However, Alexis Tsipras has concluded that the payoffs are more favorable to Greece than those of his predecessors, and so he is willing to risk a financial crisis to get the troika to Veer. The establishment is equally worried that Tsipras has underestimated the dire straits his nation is in and is at risk of triggering a crisis that may lead to Greece&rsquo;s exit from the Eurozone.</p>
<h3><u>Syriza&rsquo;s Positions and Issues:</u></h3>
<p><strong>Positions:</strong></p>
<ul>
<li>The party believes that the German economy is so dependent upon the Eurozone for its export-driven economy that it cannot risk anything that would lead to a breakup of the single-currency bloc.</li>
<li>It also believes that the exit of Greece from the Eurozone would set off the exodus of other nations and bring into question the entire European unification project that began in the 1950s with the European Coal and Steel Community. A breakdown of this order would trigger fears that Europe is heading into a period of rising nationalism that was responsible for two world wars in the last century.</li>
<li>Syriza believes that an ECB cutoff of liquidity from its banking system would trigger bank runs in the periphery nations and trigger a broad banking crisis in the Eurozone. The inability to contain bank runs may have led Chancellor Merkel to bail out Greece in 2012.</li>
<li>It also believes that the ECB will not take steps which would force Greece out of the Eurozone. To have a non-elected central bank essentially make a major political decision of this magnitude would undermine the concept of a democratic Europe.</li>
</ul>
<p><strong>Issues:</strong></p>
<ul>
<li>Syriza ran on an anti-austerity platform. To agree on extending the current bailout package would seriously undermine the party&rsquo;s support and might lead to a breakup of the coalition. Syriza is itself a broad mix of radical and center-left members; about one-third of Syriza is controlled by Left Platform, a group of unreconstructed Marxists. Any backtracking would likely lead to this group leaving the coalition and trigger new elections.</li>
<li>Syriza must deliver on some easing of austerity. Tax receipts fell as it became apparent that Syriza was likely to win as Greeks are expecting a sort of &ldquo;austerity holiday.&rdquo; If nothing changes, Syriza will face a nasty domestic backlash.</li>
<li>Greece will not be eligible for bailout funds if it does not agree to an extension of the current program, which it has vowed not to follow. Although the country could probably scrape by as its fiscal situation has improved due to austerity, its banks need liquidity from the ECB. If the ECB decides not to support the banks without a bailout extension, which the ECB is signaling, bank runs are very likely. Essentially, Greece has until 2/28 to make a deal. Syriza wants the ECB to fund its banks for six months to give it time to negotiate. At this point, it doesn&rsquo;t look like it will get that buffer.</li>
<li>Syriza is a party of government newcomers. Nearly all of its members have limited experience in formal governing.</li>
</ul>
<p>The potential for mistakes are elevated due to the party&rsquo;s lack of experience. It isn&rsquo;t obvious how much time the Greek electorate will give Syriza if it can&rsquo;t restructure the debt quickly.</p>
<h3><u>EU/Germany/ECB Positions and Issues:</u></h3>
<p><strong>Positions:</strong></p>
<ul>
<li>The group seems to believe that Greece could exit and contagion would be limited. First, while Greek sovereign yields have increased with Syriza&rsquo;s election, the yields of other periphery nations have not. This was not the case in 2012. Second, the collapse of Portugal&rsquo;s second largest bank, Banco Espirito Santo, last August suggests that European regulators can, with the efficiency of the FDIC, close a large bank and quickly contain any damage. This bank, an &euro;80.7 bn institution, was split into a &ldquo;good&rdquo; and &ldquo;bad&rdquo; bank last August without incident. Policymakers believe that any banking crisis that spreads beyond Greece could be handled as efficiently.</li>
<li>Germany especially fears that its vision of reform (called austerity elsewhere) would be irreparably harmed if Greece were to receive significant debt relief. The mainstream parties that have embraced reform, like those in Spain, would be seriously hurt if Syriza were successful. When the Popular Party in Spain argued that austerity was the only program available, it put tremendous strain on its economy. However, its leader, Mariano Rajoy, is now calling his country the &ldquo;Prussia of the South&rdquo; as the economy begins to lift. If Syriza succeeds in getting a deal, it will call into question why Rajoy subjected Spain to austerity. Simply put, if Merkel doesn&rsquo;t stop Syriza, the German view of reform will be undermined throughout the Eurozone.</li>
</ul>
<p><strong>Issues:</strong></p>
<ul>
<li>If Greece is given relief, it will foster nationalist parties in Europe which are showing signs of strength. It would also support Chancellor Merkel&rsquo;s most potent opposition, the AfD Party, which is calling for German exit from the Eurozone. If Germans begin to fear that they will be on the hook for paying the bad debts of other Eurozone nations, the message of AfD will become increasingly attractive.</li>
<li>Unlike in 2012, nearly all of Greece&rsquo;s foreign-held sovereign debt is with international organizations, like the IMF, at the ECB or with national central banks. If Greece defaults, it will be the taxpayers who will be on the hook to recapitalize the banks or the ECB will need to print money to cover the losses.</li>
<li>The ECB does not look inclined to help. Greece has a line of credit with the ECB of &euro;15 bn backed by Greek T-bills; Greece wants to expand to &euro;25 bn by using more of its debt. The ECB has indicated that this won&rsquo;t happen. Although the ECB is still allowing Emergency Liquidity Assistance (ELA), this source is more expensive and is issued by the National Bank of Greece (ADR)&nbsp;(<a href="http://www.valuewalk.com/stock-data/?stock_symbol=NYSE:NBG" title="Array">NYSE:NBG</a>). If a bank fails, Greek taxpayers will be hit for recapitalization. President Draghi used a lot of political capital to implement QE; it seems unlikely that he would expend more to defy the Germans to support Syriza.</li>
</ul>
<h3><u>The Source of Error</u></h3>
<p><strong>The following payoff table is, in our analysis, Syriza&rsquo;s perception of the current situation.</strong></p>
<p><a href="http://www.valuewalk.com/wp-content/uploads/2015/02/Greece-Greek-Games-4.jpg"><img alt="Greece Greek Games " class="aligncenter size-full wp-image-521589 disappear appear" src="http://www.valuewalk.com/wp-content/uploads/2015/02/Greece-Greek-Games-4.jpg" style="width: 600px; height: 188px;" /></a></p>
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<p>Our view is that Syriza believes that caving in to the EU will end its political movement before it really begins. Caving in produces the outcome of -100 in quadrants one and three. Thus, its only positive payoff is to press for restructuring at all costs, while the EU caves (quadrant two outcome). At the same time, we think Tsipras believes that the costs to the EU of caving to Syriza aren&rsquo;t all that high, but a situation in which both parties hold (quadrant four outcome), which probably entails a Greek exit from the Eurozone, is devastating for the EU. If the Eurozone breaks up, the Pandora Media Inc&nbsp;(<a href="http://www.valuewalk.com/stock-data/?stock_symbol=NYSE:P" title="Array">NYSE:P</a>)&rsquo;s Box of European nationalism is released with all the risks that entails. The conditions that led to two world wars will return. And, most importantly, Germany loses its single currency free-trade zone. Thus, we fear that Syriza has concluded that the EU/Germany/ECB has no choice but to cave as long as Syriza holds firm.</p>
<p><strong><u>The following is our view on the EU/German/ECB payoff table.</u></strong></p>
<p><a href="http://www.valuewalk.com/wp-content/uploads/2015/02/Greece-Greek-Games-5.jpg"><img alt="Greece Greek Games " class="aligncenter size-full wp-image-521590 disappear appear" src="http://www.valuewalk.com/wp-content/uploads/2015/02/Greece-Greek-Games-5.jpg" style="width: 599px; height: 184px;" /></a></p>
<p>From the troika&rsquo;s perspective, a face-saving outcome in which both parties cave on some matters is the best outcome. They fully expect Syriza to take that option and believe the aggressive comments against extending the current deal or even more &ldquo;extend and pretend&rdquo; on debt is just political rhetoric for domestic consumption. Thus, the leaders of the EU keep looking for Syriza to signal a first quadrant outcome. They also believe that a Greek exit won&rsquo;t be a big deal for the Eurozone but a catastrophe for Greece. Thus a quadrant four outcome should be unthinkable for Greece but not overly costly for the Eurozone. On the other hand, a quadrant two outcome, in which Greece holds and gets its way, while the EU caves, is good for Greece but terrible for the Eurozone. The German reform effort will be over. Populist parties across Europe will use Syriza&rsquo;s success to rebel against austerity and EU rules. A clear debt write-down would need to be avoided at all costs.</p>
<p>These payoff tables model our view of what the parties are calculating for their decisions. The numbers themselves are for illustration. Essentially, our analysis suggests that there is a large divergence in the perceptions of both sides but the rational choice is to hold to their respective positions. In other words, our analysis of the payoffs suggest that the EU won&rsquo;t offer debt relief and Syriza won&rsquo;t back down from demanding it.</p>
<h3><u>Ramifications</u></h3>
<p><strong>Our fear is that the markets, inured by previous bailouts, expect the Greeks to cave.</strong> And, that may be the outcome. We view a Greek exit and market crisis as a low probability/high impact event. Such circumstances are difficult for markets to discount adequately because the bad outcome is considered so awful that the markets simply assume it can&rsquo;t happen. <strong>We have tried to show in this report that rational behavior based on misperception can lead to bad outcomes.</strong></p>
<p><strong>We do fear that a Greek exit will have unexpected side effects that are not evident to policymakers.</strong> The fact that EU officials seem to believe that Greece can exit the Eurozone with minimal consequences is probably wrong. Even if the Bank of Greece implements capital controls to slow the outflow of deposits, the high level of corruption almost makes it certain that money will still flow out of the banking system, putting it at risk. At the same time, <strong>EU policymakers are assuming that contagion will not occur, which may not be accurate.</strong></p>
<p>In general, we remain cautious of European investments at this time. If this situation is resolved in a &ldquo;peaceful&rdquo; manner, that caution would be lessened. <strong>But, until it is, the risk of an unexpected negative outcome in Europe is probably higher than what is currently being discounted.</strong></p>
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http://www.zerohedge.com/news/2015-02-12/greek-game-theory-risk-negative-outcome-higher-market-thinks#commentsBorrowing CostsCentral BanksCorruptiondefaultEuropean Central BankEuropean UnionEurozoneGermanyGreeceInternational Monetary FundNationalismPortugalrecoverySovereign DebtUnemploymentUnificationFri, 13 Feb 2015 02:15:03 +0000Tyler Durden501842 at http://www.zerohedge.comRising Interest Rates & Long Term Stock Returnshttp://www.zerohedge.com/news/2015-02-11/rising-interest-rates-long-term-stock-returns
<p><a href="http://streettalklive.com/index.php/daily-x-change/2606-rising-interest-rates-long-term-stock-returns.html"><em>Submitted by Lance Roberts via STA Wealth Management</em></a>,</p>
<div class="highslide-gallery">
<p style="text-align: justify;">With the Federal Reserve now indicating that they are <em>&quot;really serious&quot;</em> about raising interest rates, there have come numerous articles and analysis discussing the impact on asset prices. <a href="http://www.businessinsider.com/how-stocks-move-around-first-fed-rate-hikes-2015-2">To wit:</a></p>
<blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>&quot;&#39;Stocks typically sell-off on the first of a series of rate hikes, but the magnitude and duration of the sell-off depend on conditions,&#39; Bianco writes. &#39;During early cycle hikes the initial sell-off was generally small, quickly recovered and further S&amp;P gains came in next three months and longer (like 2004, 1983, 1972). But many sell-offs on late cycle hikes became corrections or even bear markets.&#39;</p>
<p>&nbsp;</p>
<p>Unfortunately, it&#39;s only in hindsight do we know where we are in the cycle.</p>
</blockquote>
<p style="text-align: justify;"><strong>While David is correct in his analysis, in my view, it is too short of a window for investors. </strong>While the markets, due to momentum, may ignore the effect of <em>&quot;monetary tightening&quot;</em> in the short-term, what about longer-term?&nbsp;</p>
<p style="text-align: justify;">That is the question I want to examine today. As shown in the table below, the bulk of losses in markets are tied to economic recessions<em>.&nbsp;</em>However, there are also other events such as the Crash of 1987, the Asian Contagion, Long-Term Capital Management, and others that led to sharp corrections in the market as well.</p>
<p style="text-align: justify;"><a class="highslide ageent-ru" href="http://streettalklive.com/images/1dailyxchange/2015/SP500-Recession-Recovery-Table-021115.PNG" target="_blank" title="SP500-Recession-Recovery-Table-021115"><img alt="SP500-Recession-Recovery-Table-021115" class="i_want_img5" src="http://streettalklive.com/images/1dailyxchange/2015/SP500-Recession-Recovery-Table-021115.PNG" style="width: 600px; height: 420px;" /></a></p>
<p>The next table shows the date of the first Fed rate hike, the corresponding level of GDP at the time of the first rate hike and the financial markets. It also counts the number of months until the next event which was either a recession, a market correction or both.</p>
<p><a class="highslide ageent-ru" href="http://streettalklive.com/images/1dailyxchange/2015/Rate-Hikes-Problems-021115.PNG" target="_blank" title="Rate-Hikes-Problems-021115"><img alt="Rate-Hikes-Problems-021115" class="i_want_img5" src="http://streettalklive.com/images/1dailyxchange/2015/Rate-Hikes-Problems-021115.PNG" style="width: 601px; height: 244px;" /></a></p>
<p>The point is that in the short-term the economy and the markets<em> (due to the current momentum)</em> can <strong>SEEM TO DEFY</strong> the laws of gravity as interest rates begin to rise. However, as rates continue to rise they ultimately acts as a <em>&quot;brake&quot;</em> on economic activity. Think about the all of the areas that are <strong>NEGATIVELY impacted by rising interest rates</strong>:</p>
<blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>1) Rising interest rates raise the debt servicing requirements which reduces future productive investment.</p>
<p>&nbsp;</p>
<p>2) Rising interest rates will immediately slow the housing market taking that small contribution to the economy away.&nbsp; People buy payments, not houses, and rising rates mean higher payments. (Read <a href="http://streettalklive.com/index.php/analysis/daily-x-change.html?id=2185">&quot;Economists Stunned By Housing Fade&quot;</a> for more discussion)</p>
<p>&nbsp;</p>
<p>3) An increase in interest rates means higher borrowing costs which leads to lower profit margins for corporations.&nbsp; This will negatively impact corporate earnings and the financial markets.</p>
<p>&nbsp;</p>
<p>4) One of the main arguments of stock bulls over the last 5-years has been the <strong>stocks are cheap based on low interest rates.</strong>&nbsp; When rates rise the market becomes <strong>overvalued</strong> very quickly.</p>
<p>&nbsp;</p>
<p>5) The massive derivatives and credit markets will be negatively impacted. Much of the recovery to date has been based on suppressing interest rates to spur growth.</p>
<p>&nbsp;</p>
<p>6) As&nbsp;<span style="line-height: 1.3em;">rates increase so does the variable rate interest payments on credit cards.&nbsp; With the consumer being impacted by stagnant wages and increased taxes, higher credit payments will lead to a rapid contraction in income and rising defaults.</span></p>
<p>&nbsp;</p>
<p><span style="line-height: 1.3em;">7) Rising defaults on debt service will negatively impact banks which are still not adequately capitalized and still burdened by large levels of bad debts.</span></p>
<p>&nbsp;</p>
<p><span style="line-height: 1.3em;">8) Many corporate share buyback plans and dividend issuances have been done through the use of cheap debt, which has led to increases corporate balance sheet leverage. This will end.</span></p>
<p>&nbsp;</p>
<p><span style="line-height: 1.3em;">9) Corporate capital expenditures are dependent on borrowing costs. Higher borrowing costs leads to lower capex.</span></p>
<p>&nbsp;</p>
<p>10<span style="line-height: 1.3em;">) The deficit/GDP ratio will begin to soar as borrowing costs rise sharply. The many forecasts for lower future deficits will crumble as new forecasts begin to propel higher.</span></p>
</blockquote>
<p style="text-align: justify;">I could go on, but you get the idea.</p>
<p>However, the mainstream media continues to run with the idea that you shouldn&#39;t fear the Fed beginning to increase interest rates. This is something that I addressed more deeply in <a href="http://streettalklive.com/index.php/component/flexicontent/2-the-daily-x-change/2362-don-t-fear-rising-interest-rates-really.html?Itemid=164">&quot;Don&#39;t Fear Rising Interest Rates? Really?&quot;</a></p>
<blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><strong>&quot;Do Rising Interest Rates Lead To Higher Stock Prices? </strong>This claim falls into the category of &#39;<em>timing is everything.&#39; </em>The chart below has been circulated quite a bit to support the <em>&quot;don&#39;t fear rising interest rates&quot;</em> meme. I have annotated the chart to point out the missing pieces.</p>
</blockquote>
<p><a class="highslide ageent-ru" href="http://streettalklive.com/images/1dailyxchange/misc/Stocks-Vs-InterestRates-082514.png" target="_blank" title="Stocks-Vs-InterestRates-082514"><img alt="Stocks-Vs-InterestRates-082514" class="i_want_img5" src="http://streettalklive.com/images/1dailyxchange/misc/Stocks-Vs-InterestRates-082514.png" style="width: 600px; height: 516px;" /></a></p>
<p>As I stated above, timing is everything. While rising interest rates may not <em>&quot;initially&quot;</em> drag on asset prices, <strong>it is a far different story to suggest that they won&#39;t.</strong> In fact, there have been <strong>absolutely ZERO times in history</strong> that the Federal Reserve has begun an interest rate hiking campaign that has not eventually led to a negative outcome.</p>
<p><a class="highslide ageent-ru" href="http://streettalklive.com/images/1dailyxchange/2015/Fed-InterestRates-GDP-Crisis-021115.PNG" target="_blank" title="Fed-InterestRates-GDP-Crisis-021115"><img alt="Fed-InterestRates-GDP-Crisis-021115" class="i_want_img5" src="http://streettalklive.com/images/1dailyxchange/2015/Fed-InterestRates-GDP-Crisis-021115.PNG" style="width: 600px; height: 303px;" /></a></p>
<p>What the majority of analysts fail to address is the <strong><em>&quot;full-cycle&quot;</em> effect from rate hikes.</strong> While equities may initially provide a haven from rising interest rates during the first half of the rate cycle, they have been a destructive place to be during the last half.</p>
<p>While the mainstream analysis is not to fear rising interest rates in the short-run, as longer-term investors it is crucially important to the preservation of investment capital to understand the dynamics of increasing interest rates.&nbsp;</p>
<p>In summary, here are the things that you need to know:</p>
<blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>1) There have been <strong>ZERO times</strong> that the Federal Reserve has entered into a rate hiking campaign that did not have a negative consequence.</p>
<p>&nbsp;</p>
<p>2) The average period following an increase in the effective funds rate to either a stock market correction, economic recession or both has been 20.75 months. Therefore, if we assume an initial increase in the Fed funds rate in June of 2015, that would put the next negative event sometime in the first quarter of 2017.</p>
<p>&nbsp;</p>
<p>3) However, the median number of months following the initial rate hike has been 17 months. This would advance the timeframe into mid-2016. Such a timeframe would coincide with both the <a href="http://streettalklive.com/index.php/component/flexicontent/2-the-daily-x-change/2263-could-stocks-melt-up.html">Decennial and Presidential cycles as discussed previously.</a></p>
<p>&nbsp;</p>
<p>4) Importantly, <strong>there have been only two times in recent history that the Federal Reserve has increased interest rates from such a low level of annualized economic growth.</strong> The most relevant period was in 1983 when the economy was recovering from two adjacent recessions. Due to such weak economic growth, the impact of rising interest rates <strong>tripped up the stock market just 17 months later.</strong></p>
<p>&nbsp;</p>
<p>5) Lastly, it is crucially important to recognize that the ENTIRETY of the <em>&quot;bullish&quot;</em> analysis is based on a sustained 34-year period of falling interest rates, inflation and annualized rates of economic growth. With all of these variables near historic lows, we can only really guess at how asset prices, and economic growth, will fair going forward.</p>
</blockquote>
<p>What is clear from the analysis is that bad things have tended to follow the Federal Reserve&#39;s first interest rate increase. While the markets, and economy, may seem to perform okay during the initial phase of the rate hiking campaign, the eventual negative impact will push most individuals to <em>&quot;panic sell&quot;</em> near the next lows. <strong>Emotional mistakes are 50% of the cause as to why investors consistently underperform the markets over a 20-year cycle.</strong></p>
<p>For now the bullish trend is still in place and should be<em> &quot;consciously&quot;</em> honored. However, while it may seem that nothing can stop the markets current rise, it is crucial to remember that it is <a href="http://streettalklive.com/index.php/it-s-only-like-this-until-it-s-like-that.html"><em>&quot;only like this, until it is like that.&quot;</em></a> For those <em>&quot;asleep at the wheel,&quot;</em> there will be a heavy price to pay when the taillights turn red.</p>
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http://www.zerohedge.com/news/2015-02-11/rising-interest-rates-long-term-stock-returns#commentsBorrowing CostsCapital ExpendituresFailFederal ReserveHousing MarketRecessionrecoveryWed, 11 Feb 2015 17:44:51 +0000Tyler Durden501768 at http://www.zerohedge.comPuerto Rico Is Not Greece, But Their Bonds Are Yielding Almost The Samehttp://www.zerohedge.com/news/2015-02-09/puerto-rico-not-greece-their-bonds-are-yielding-almost-same
<p>While PRexit is yet to hit the headlines, Puerto Rico bonds joined an illustrious club of ne'er-do-wells today with its <strong>10Y yield spiking above 10%...</strong></p>
<p>&nbsp;</p>
<p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/02/20150209_PR.jpg"><img src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/02/20150209_PR_0.jpg" width="600" height="314" /></a></p>
<p>&nbsp;</p>
<p>The surge comes after a <strong>judge threw out a debt-restructuring law that lawmakers passed last year.</strong> As Bloomberg reports,</p>
<blockquote><div class="quote_start">
<div></div>
</div>
<div class="quote_end">
<div></div>
</div>
<p>The steepening borrowing costs come at a crucial time for the U.S. territory: <strong>Officials want to sell $2 billion of petroleum tax-backed debt to pump cash into the Government Development Bank, which lends to the island and its localities.</strong>&nbsp;&nbsp; </p>
<p>&nbsp;</p>
<p>Puerto Rico and its agencies have $73 billion of debt, more than all U.S. states but California and New York. Most of the securities are tax-free nationwide and held by investors around the country. General obligations maturing in 2035 traded with average yields above 10 percent, the highest since they were issued in March 2014. The securities changed hands for as low as 81 cents on the dollar.</p>
<p>&nbsp;</p>
<p><strong>The selloff is "putting pressure on liquidity for the commonwealth, which has implications for just about everything they do,'' </strong>said Bill Black, who helps manage Invesco Ltd.'s $7.5 billion High Yield Municipal Fund.</p>
<p>&nbsp;</p>
<p><strong>U.S. District Judge Francisco A. Besosa ruled Feb. 6 that the restructuring law that Governor Alejandro Garcia Padilla signed in June would take away protections provided under federal bankruptcy code, presenting an "irreconcilable conflict."</strong></p>
<p>&nbsp;</p>
<p><strong>Puerto Rico plans to appeal the ruling, </strong>Secretary of Justice Cesar Miranda said in a statement Monday. The law would have allowed certain Puerto Rico agencies, such as its power utility, to negotiate with bondholders to reduce their debt. By strengthening the hand of those investors, the decision may leave less cash available for Puerto Rico general obligations, said Black at Invesco, which owns some of the utility debt. </p>
<p>&nbsp;</p>
<p>"It is important that the commonwealth's creditors, other constituents of political entities and the public interest that these entities serve, benefit from mechanisms necessary to adjust their debts in an orderly manner at an economic cost that is prudent and in the best interests of the commonwealth,'' Melba Acosta, president of the GDB, said in a statement.</p>
<p>&nbsp;</p>
<p><strong>Throwing out the restructuring law restores bondholders' ability to force Puerto Rico and its agencies to raise taxes or electricity rates, cut staff and negotiate fuel contracts, </strong>said Daniel Hanson, an analyst at Height Securities LLC, a Washington-based broker-dealer.</p>
<p>&nbsp;</p>
<p><strong>"Puerto Rico is now in a meaningful position of weakness with respect to its bondholders,'' Hanson said. "It forces the government's hand in public-policy questions. They either make decisions that are bond-friendly or they're forced to make decisions later on by courts."</strong></p>
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<p><em>Chart: Bloomberg</em></p>
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http://www.zerohedge.com/news/2015-02-09/puerto-rico-not-greece-their-bonds-are-yielding-almost-same#commentsBankruptcy CodeBorrowing CostsCreditorsGreeceheadlinesHigh YieldPuerto RicoTue, 10 Feb 2015 13:12:12 +0000Tyler Durden501687 at http://www.zerohedge.comThe Death Of The Petrodollar Was Finally Noticedhttp://www.zerohedge.com/news/2015-02-07/death-petrodollar-was-finally-noticed
<p>Three months ago, we wrote "<a href="http://www.zerohedge.com/news/2014-11-03/how-petrodollar-quietly-died-and-nobody-noticed">How The Petrodollar Quietly Died, And Nobody Noticed</a>", in which we explained in painful detail why far from the simple macroeconomic dogma which immediately prompted the macro tourists to scream that "<em>oil prices dropping are good for US consumers</em>", the collapse in the price of crude is not only a disaster for oil exporting nations - one which will lead to a series of violent "Arab Springs" across the oil-producing developed world - but far more importantly, have a massive impact on capital markets as a result of the plunge in the most financialized commodity in history. </p>
<p>On the death of the Petrodollar we commented that unlike previously, when petrodollar recycling funneled the proceeds from oil-exports into financial markets, helping to boost asset prices and keep the cost of borrowing down, henceforth "oil producers will effectively import capital amounting to $7.6 billion." We added that "<strong>oil exporters are now pulling liquidity out of financial markets rather than putting money in. </strong>That could result in higher borrowing costs for governments, companies, and ultimately, consumers as money becomes scarcer."</p>
<p>The conclusion was simple: "net capital flows will be negative for EM, <strong>representing the first net inflow of capital (USD8bn) for the first time in eighteen years. </strong>This compares with USD60bn last year, which itself was down from USD248bn in 2012. At its peak, recycled EM petro dollars amounted to USD511bn back in 2006. The declines seen since 2006 not only reflect the changed&nbsp; global environment, but also the propensity of underlying exporters to begin investing the money domestically rather than save. <strong>The implications for financial markets liquidity - <span style="text-decoration: underline;">not to mention related downward pressure on US Treasury yields</span> – is negative.</strong>"</p>
<p>In retrospect, it probably was not "simple enough", because even three months ago <strong>everyone </strong>was confident that both higher yields and an increase in market liquidity are imminent. Since then not only has the yield on the 10 Year plunged to near record low levels (while 16% of global government debt now trades at negative yields), but judging by the absolute liquidity devastation in <a href="http://www.zerohedge.com/news/2015-01-15/us-equity-market-liquidity-evaporates-3-year-lows">the E-Mini</a>, <a href="http://www.bloomberg.com/news/articles/2015-02-02/if-trading-bonds-is-hard-think-about-the-pain-when-rates-rise">in Trasurys </a>and virtually every other asset class, few actually grasped the implications of what plunging oil really means in a world in which this most financialized of commodities plays a massive role in both the global economy and capital markets, not to mention in geopolitics, with implications far, far greater than the amateurish "<em>yes, but gas is now cheaper</em>" retort.</p>
<p>So, three months later, we are happy to report that <em><strong>somebody </strong></em>finally noticed that the Petrodollar has indeed finally died, and more importantly, has attempted to put together an analysis of what we said in early November, reaching the conclusion that plunging oil just may not be all that financial comedy TV has it cracked up to be.</p>
<p>Did we say somebody? We meant everyone! </p>
<p>Below are extensive, in-depth, and <em><strong>long overdue </strong></em>questions on petrodollar recycling, or rather its halt, and its implications from virtually every single Bank of America economist and strategist who after months of stalling, have finally been forced to confront this most critical of topics head on.</p>
<p><em>From Bank of America</em></p>
<p><strong>Q&amp;A on petrodollar recycling</strong></p>
<ul>
<li>We explore the economic, financial, and geopolitical implications that will result from the collapse in oil prices and the reduction in petro-dollar flows.</li>
<li>We see a limited impact on UST yields or the USD. In recent years, the UK, Euro area and EEMEA have benefitted from reserve diversification away from the USD. A drying-out of petrodollar flows will reduce funding availability for current account deficit countries, particularly the UK, and may hurt London’s real estate sector.</li>
<li>Venezuela’s debtors such as Cuba, which benefitted from Petrocaribe loans, as well as left-leaning regimes in LatAm, will feel the pressure. Russia could lose regional influence, although Ukraine’s dependence on its gas is still very high. Lower oil prices should diminish the ability of Iran to project regional power. Growth model limitations could eventually accentuate GCC social pressures, in our view.</li>
</ul>
<p><strong>The oil market outlook</strong></p>
<p><em><strong>Alberto Ades, co-head of Global Economics: </strong>Sabine, the natural starting point to a discussion of petrodollar recycling is an assessment of the oil market. What is your reading of OPEC’s policy shift?</em></p>
<p><strong>Sabine Schels, commodity strategist: </strong>Before the recent oil rebound, Brent crude oil prices came off almost in a straight line from $115 to $50/bbl, making three very brief stops at $85, $80 and $60. <strong>That marks the second steepest six-month decline in the oil market’s history. </strong>In a dramatic policy shift, OPEC supply has kept increasing in recent quarters despite falling prices, as Saudi Arabia seems intent on increasing its market share, irrespective of the impact on price. Saudi Arabia has pledged not to take out supply even if the price drops to $40, $30 or even $20 per barrel, suggesting curtailments will have to come from high cost non-OPEC producers.</p>
<p><a href="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/02/petro%201.jpg"><img src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/02/petro%201_0.jpg" width="600" height="522" /></a></p>
<p>The sharp price decline is delivering a windfall-tax to consumers globally while giving a major blow to producers. For GCC alone, it is equivalent to $440bn in foregone revenues. In our view, OPEC’s decision to give up on its traditional role of keeping supply and demand in check <strong>will have far-reaching consequences across all asset classes as the flow of OPEC petrodollars is drying up. </strong>In the absence of a quick and sharp rebound in oil prices, <span style="text-decoration: underline;"><strong>this may drain liquidity from global asset markets, at least for the remainder of 2015</strong></span>.</p>
<p><em><strong>Alberto Ades: </strong>Recently, you cut your oil price forecasts significantly. What drives your bearish view on oil prices for the next few months?</em></p>
<p><strong>Sabine Schels: </strong>Basically, supply keeps running above demand. The term structure of Brent, which preceded the collapse in prices, continues to weaken across the next 12 months as inventories are building at an alarming speed, setting the stage for lower, not higher prices.</p>
<p>Inventories typically build because supply exceeds demand in any given market. But in some markets, like oil or gas, storage capacity is a finite number and price declines can accelerate as inventories build. In previous oil price downturns, OPEC would reduce supply as stocks built up to prevent a collapse in the term structure of prices. After all, when the price of storage soars, storage operators benefit and oil producers suffer</p>
<p>However, this new OPEC policy will likely create a large inventory overhang, suggesting further downside risks to oil prices. In fact, we see floating storage coming into play over the coming months with <strong>roughly 55 million barrels building on ships by the end of 2Q15 as land-based inventories across North America, Europe and Asia fill up. </strong>But even floating storage is limited by its very nature. If crude vessels fill up, shipping rates will spike; and that is unlikely to help any oil producer in the world.</p>
<p><em><strong>Alberto Ades: </strong>Given this new OPEC policy, couldn’t non-OPEC producers simply turn off supply to stabilize prices? Are these producers large enough to influence the market significantly?</em></p>
<p><strong>Sabine Schels: </strong>To restore equilibrium in the oil market, we would need a sizeable supply cut of at least 1 million b/d. In our view, <strong>it is not reasonable to expect non-cartelized production to shut down immediately as prices fall because many producers are well hedged, face very low cash costs, are partially protected by falling domestic currencies or tax breaks, or are notoriously slow to react. </strong>According to our estimates, with the exception of shale oil, which is cash flow intensive and thus dependent on price (current or forward), <strong>non-cartelized crude oil output in many parts of the world is not price sensitive at all, particularly in the first 12 months.</strong></p>
<p>In the absence of a moderating agent like Saudi Arabia, this means prices have to fall below operating cash costs (non-shale) <strong>or well below cash flow breakevens (shale) for marginal producers. </strong>In our view, non-OPEC oil supply cuts will not come easy in the short run, as operating cash costs sit below $40/bbl. True, investments will be put on hold as some of the world’s output is challenged below $70/bbl in the long run. However, production guidance continues to point up in 2015 for most listed companies. Unless production guidance for 2015 goes negative or Saudi Arabia changes its policy, the market could become more disorderly as oil prices find a floor around operating cash costs. </p>
<p><strong>As a result, we now expect oil prices to spiral down toward the end of 1Q and target Brent at $31/bbl and WTI at $32/bbl</strong>.</p>
<p><em><strong>Alberto Ades: </strong>Since you expect no significant price bounce in the near future, do you see a risk of the flow of petrodollars drying up in the longer term? </em></p>
<p><strong>Sabine Schels: </strong>We have argued that once spending cuts by non-OPEC producers, most likely US shale oil, are in place, Brent crude prices should start to recover. This will likely happen in the second half of this year, to a year-end target of $57/bbl. For 2016, we forecast Brent crude oil prices averaging $58/bbl. All else equal, this should increase the flow of petrodollars to the global economy, though to levels much lower than when oil was in the $100+/bbl environment. However, there is a risk to our base case. This assumption relies heavily on Saudi Arabian production staying at around the current level of 9.7 million b/d. While the kingdom pledges not to cut output to prevent prices from falling, <strong>this new OPEC policy could imply raising output, thus cutting into effective spare capacity. If this occurs, oil prices may stay low for longer, depressing the flow of petrodollars for years to come</strong>. This would allow them to increase their market share as oil prices recover, rather than allow shale producers in the US to reenter the market.</p>
<p>In this context, it is important to note that Saudi production is close to a record high in terms of total output, but not in terms of its share of the global market. So the question remains whether the Saudis want to put their spare capacity to work in coming years and increase output beyond 12 million b/d as oil prices start to recover. In that scenario, we estimate the fiscal budget breakeven price for the Kingdom would fall quickly, by $22/bbl from $94/bbl currently, meaning much-trumpeted reserves would last even longer to sustain this new policy.</p>
<p><em><strong>Alberto Ades: </strong>Could a rebound in global economic activity support an oil price recovery, even under the new OPEC policy?</em></p>
<p><strong>Sabine Schels: </strong>Our models suggest a six-month lag before lower prices start to impact consumption positively. Assuming the lower prices create no spiraling effect in emerging markets, this means global consumption should accelerate meaningfully in the second half of this year and into 2016.</p>
<p>Global oil demand is driven by net oil importing countries and large oil producers. Incrementally, we still expect China and India to deliver the bulk of the global consumption increase in 2015, although we do not expect China’s oil demand to grow nearly as fast as it did between 2004 and 2010, given domestic housing woes and an expensive currency.</p>
<p>While large importing countries like the US, China and India will likely see a bounce in consumption in 2015 and 2016, demand in oil-producing countries could be meaningfully slower next year as recession bites in Russia and lower oil prices negatively impact Middle East economies. After all, many oil producers had<br />their cake and ate it too for years as oil prices rose.</p>
<p>As a result, <strong>we remain very concerned that slower demand from oil-producing countries could come back to haunt the market.</strong> We estimate 50% of the growth in demand in the last 10 years has come from oil-producing countries, <strong>a clear downside risk to prices, and the flow of petrodollars, </strong>from here.</p>
<p><strong>GCC: a possible tectonic shift in petrodollar recycling</strong></p>
<p><em><strong>Alberto Ades: </strong>Jean-Michel, let’s turn to the regional impact of the petrodollar recycling dry-up for the countries in the Gulf Cooperation Council (GCC). How did these countries recycle petrodollars during the oil boom years?</em></p>
<p>Jean-Michel Saliba, Middle East and North Africa economist: GCC oil export earnings totaled roughly US$1.04tn in 2014, for a cumulative US$10.8tn since 1970. <strong>These revenues have been recycled through two main channels, the absorption and financial account channels</strong>. The former refers to the use of oil export receipts to finance imports of goods and services. Through the second channel, current account surpluses translate into <span style="text-decoration: underline;"><strong>net financial investments in the rest of the world</strong></span>. The split in these flows comes from the sovereign’s intertemporal allocation decision between spending under the absorption channel and saving under the financial account channel. The latter also <strong>involves an asset allocation decision</strong>.</p>
<p><em><strong>Alberto Ades: </strong>Let’s first discuss the absorption channel. How has it evolved since the 1970s?</em></p>
<p><strong>Jean-Michel Saliba</strong>: GCC absorption capacity has increased steadily with the launch of large diversification and infrastructure spending programs. We estimate that around half of the GCC oil export earnings were spent and recycled through imports between 2003 and 2014. In comparison, during the oil boom of the 1970s and 1980s, the ratio of imports to exports increased rapidly from 0.3 to 0.6 on average in the 1980s and then remained fairly elevated on large domestic development plans and declining oil prices. After peaking at 0.8 in 1986, the ratio has declined gradually after the spending drop of the 1990s. This suggests the absorption channel has diminished in importance for GCC this time around. </p>
<p>Also, in the past, higher GCC imports lent support to global demand and mitigated the widening of DM current account deficits due to higher oil prices. In other words, imports were sourced back from developed markets. Over time, this channel has become somewhat USD-negative as trade links with the US decreased at the expense of the rise in the share of Asia.</p>
<p><em><strong>Alberto Ades: </strong>Is it safe then to conclude that the financial account channel has recently gained importance for the GCC?</em></p>
<p><strong>Jean-Michel Saliba: </strong>Yes, and this is probably the reason why this is the channel people tend to focus on when speaking of petrodollar recycling. Current account data suggest the GCC has accumulated $2.7tn in net foreign assets since the 1970s1, $2.4tn of which has likely come during the most recent oil boom that started in 2004 </p>
<p><a href="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/02/chart%206.jpg"><img src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/02/chart%206_0.jpg" width="600" height="253" /></a></p>
<p>Saving GCC petrodollars in the form of foreign assets held abroad has occurred largely through the official sector. In turn, the GCC official sector’s outward investment has helped sterilize oil receipts. This has shielded the domestic economies from excessive or volatile liquidity, albeit only incompletely given the presence of currency pegs and robust fiscal expansion.</p>
<p>Over time, the role of the GCC monetary authorities, except for the Saudi Arabia Monetary Agency (SAMA), has been eclipsed by the rise of sovereign wealth funds. This likely implies a less risk-averse asset allocation by GCC. </p>
<p><em><strong>Alberto Ades: </strong>You bring up an important new player, namely the SWFs. Their relative size and influence over global markets has increased sharply since the</em><br /><em>1980s. What are the implications of this?</em></p>
<p><strong>Jean-Michel Saliba: </strong>For one thing, the growing relevance of the financial account channel and the rise of SWFs have made it more difficult to track the flows accurately. Through our work, we have been able to account for the geographical destination of only about 50% of the accumulated GCC net foreign investment.</p>
<p>Previously, tracking was simpler because the bulk of financial flows passed through DM banks or DM securities markets. The GCC current account surpluses could broadly be explained by increases in FX reserves and bank deposits in the US and Bank of International Settlements (BIS) reporting countries. For example, between 1974 and 1979, 47% of total identified investments were deposited in bank accounts in developed economies or used to purchase UK or US money market instruments. The rest were simply used for long-term lending, mainly to developing economies through international banks. These patterns actually planted the seeds of the 1980s debt crises when flows dried out.</p>
<p>This time, financial account flows appear to have gained in sophistication, with diversification across a larger set of asset classes and geographies, including regional and domestic ones. This likely implies a potentially less risk averse asset allocation by the GCC countries </p>
<p><em><strong>Alberto Ades: </strong>Of what you have been able to track, what are the geographical destinations of GCC petrodollar investment flows?</em></p>
<p><strong>Jean-Michel Saliba: </strong>We believe <span style="text-decoration: underline;"><strong>the bulk of petrodollars recycled through the financial channel ended, either directly or indirectly, in the deep and liquid US financial markets. </strong></span>After all, the rise in the GCC current account surpluses was mirrored by the widening of the US current account deficit, whereas Emerging Asia has run surpluses and the Eurozone has kept relatively flat external balances. Therefore, these flows ended up financing the US, for the most part. Petrodollars may have funded an increase in domestic and regional investment on a relative basis as well, but this remains hard to quantify. That said, the Abu Dhabi Investment Authority (ADIA) allocation could be used as a very rough guide on investment flows. Long-term neutral EM benchmark exposure for ADIA consists of between 15% and 25% of assets under management. This contrasts with 35-50% for North America, 20-35% for Europe and 10-20% for Developed Asia. Note that around 75% of ADIA’s assets are managed externally and some 55% of ADIA’s assets are invested in index-replicating strategies.</p>
<p>In terms of the cumulative stock of identified GCC foreign asset holdings, most of it is concentrated in foreign direct investments in Europe, Asia, and the US, BIS offshore bank deposits and US equities </p>
<p><a href="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/02/chart%204.jpg"><img src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/02/chart%204_0.jpg" width="600" height="504" /></a></p>
<p><em><strong>Alberto Ades: </strong>What would be the main implications of the dry-up in petrodollar recycling likely to happen in a lower oil price environment?</em></p>
<p><strong>Jean-Michel Saliba: </strong>Lower oil prices for longer <span style="text-decoration: underline;"><strong>should imply material shifts in the size and direction of petrodollar recycling flows</strong></span>. Every $10/bbl drop in oil prices shaves off 4.2% of GDP from GCC current account balances. The move in oil prices between US$115/bbl and US$52/bbl would therefore shave off US$440bn in export revenues annually. <strong>The GCC external current account breakeven oil price is at approximately $65/bbl, </strong>which would only make the region a net external creditor if oil prices rebound sharply this year. The regional fiscal breakeven oil price is at $85/bbl, suggesting the GCC is set to run a fiscal deficit on aggregate, the bulk of which is likely to be financed through a drawdown of foreign assets currently held abroad.</p>
<p>History suggests GCC’s fiscal adjustment occurs with a lag. This would imply a sticky absorption channel through still elevated imports in the near term. During the first year or so of low oil prices, a country such as Saudi Arabia would draw down its official reserves to finance the balance of payments gap. These assets are most likely invested in foreign deposits and liquid US securities, which would take a hit. Later, financial account flows, which in the era of high oil prices were invested abroad to sterilize oil receipts, would likely reverse their direction. This would leave a more manageable drawdown of official central bank assets. Petrodollar shifts could reshape the geopolitical landscape</p>
<p><em><strong>Alberto Ades: </strong>Jean-Michel, let’s conclude by discussing the changing geopolitics. What impact do you expect for the Middle Eastern conflicts?</em></p>
<p><strong>Jean-Michel Saliba: </strong>Over a longer time frame, we would expect lower financial support to regional proxy armed groups to weaken some of the geopolitical dynamics on the ground. However, this can be moderated by various factors. First, in the local press, the Iranian leadership has expressed its belief that the new Saudi oil policy regime has clear geopolitical motives. The closest analogy is perhaps the 1985 Saudi oil policy regime shift, which sent oil prices tumbling and weighed on the conduct of the Iran-Iraq war. Iranian Foreign Minister Zarif recently suggested that lower oil prices diminish the possible gains of the Iranian regime concluding a nuclear deal with the P5+1 countries. Also, we note the Iranian macro adjustment could make the threat of further sanctions less potent.</p>
<p>Second, the resurgent Houthi military gains in Yemen, continued engagement in the Syrian conflict and recent Hezbollah-Israeli hostilities suggest Iranian regional ideological involvement is unlikely to alter course materially in the near term given the elevated stakes. In addition, a number of regional proxy armed groups were founded in the mid-1980s and appear to have developed alternative financing mechanisms.</p>
<p>Finally, in some instances, lower oil prices could accentuate sectarian conflicts in the Middle East. We suggested a risk to the colonial Sykes-Picot borders in Iraq, which has been addressed imperfectly through US external intervention and the recent budgetary agreement between Baghdad and the Kurdistan Regional Government. However, low oil prices challenge the economics of the deal and deepen Iraq’s fiscal strains and liquidity crunch.</p>
<p><em><strong>Alberto Ades: </strong>Venezuela is another oil exporter that will also be directly impacted. Francisco, how did Venezuela recycle petrodollars during the previous oil boom? I get the sense that geopolitical trends in the region can’t be understood without a reference to Venezuela and the “grants” it distributed to countries with shared political affinities. Is this correct?</em></p>
<p><strong>Francisco Rodríguez, Andean economist: </strong>Definitely. High oil prices in recent years allowed Venezuela to expand its influence in the region. The cost of this was very large for the country. We estimate the stock of loans to regional allies currently outstanding totals $25bn. This is larger than the current Venezuelan international reserves. In other words, the opportunity cost of Venezuelan foreign policy was not building a stabilization fund that would have enabled it to smooth out the adjustment during periods of declining oil prices. </p>
<p><strong>These policies are unsustainable at current oil prices.</strong> In fact, the data already show a notable decline in trade credits and other public sector investment assets, two capital account items that essentially capture the change of liabilities of other countries with Venezuela generated as a result of Petrocaribe and other cooperation agreements. Net lending to other countries, as captured by the sum of these lines, fell to $1.9bn in the first three quarters of 2014 from $5.9bn and $11.2bn for comparable periods in 2013 and 2012, respectively.</p>
<p><em><strong>Alberto Ades: </strong>And are we already seeing some of the effects of these drying out?</em></p>
<p><strong>Francisco Rodríguez</strong><em>: </em>Absolutely, the restoration of full diplomatic relations between the United States and Cuba is an important byproduct of this decline in Venezuela’s influence. From Cuba’s vantage point, the need to change its sources of external income is evident. As of 2013, it received oil shipments from Venezuela totaling 98mbd. In our view, the implications of this important announcement reach beyond Cuba’s borders, as it can help reshape the relationships between the US and Latin America, a region where a large fraction of governments is headed by leftist parties.</p>
<p><em><strong>Alberto Ades: </strong>We cannot discuss geopolitics of oil without discussing Russia. Every day we hear that Russia will not only be affected economically but also politically, and even socially. Vladimir, overall, how important is oil for Russia?</em></p>
<p><strong>Vladimir Osakovskiy, Russia and CIS economist</strong>: We believe the impact of oil prices goes well beyond the economy and deeper into Russian society. This dependence goes all the way back to the late 1970s, when the then USSR became one of the major energy exporters and an important player on the global energy markets. In periods of relatively high oil prices, the abundant inflow of capital tended to create strong momentum in the economy, which also coincided with periods of a very assertive foreign and domestic policy </p>
<p><a href="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/02/chart%207.jpg"><img src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/02/chart%207_0.jpg" width="600" height="414" /></a></p>
<p>For example, historically high oil prices between the late 1970s and early 1980s correlated with the peak of the tensions between the US and the USSR in various parts of the world. More recently, record high oil prices in mid-2008 and between 2011 and early 2014 coincided with a brief war with Georgia in August 2008 and the political crisis in Ukraine. On the contrary, periods of low and falling oil prices have coincided with times when Russia’s relations with the West tended to improve. We can say that with respect to the entire Perestroika in 1987 and the US-Russia reset in early 2009.</p>
<p>Also, there are numerous ways in which such high oil revenues have been converted into political capital. Obviously, more abundant capital gave the government a greater ability to increase spending on such a political item as defense, which gave it more tools for an independent foreign policy on the international agenda. Russia's defense spending reached peaks in the mid-1980s and in 2014.</p>
<p>Similar to what Francisco described for Venezuela, abundant and expansive energy resources also provide a lot of “soft power” that can be converted easily into political benefits through discounted gas shipments, direct financial support to loyal governments, etc. Over the past 5-10 years Russia has been quite active in supporting loyal governments in Belarus, Armenia and Ukraine. However, the capacity for such soft power is declining with lower oil prices and, even more importantly, the value of energy concessions that Russia can offer is falling as well.</p>
<p><em><strong>Alberto Ades: </strong>Vadim, with all this background that Vladimir outlined, can we expect easing of the geopolitical tensions in Ukraine as a result?</em></p>
<p><strong>Vadim Khramov, Ukraine and CEE economist: </strong>From the geopolitical standpoint, there is an argument that Russia would have to take a softer stance on Ukraine, as falling oil prices and western sanctions hurt the Russian economy. For now, the conflict in eastern Ukraine is still ongoing and at the end of 2014, there was even some escalation of tensions. Therefore, it is hard to say that Russia is taking a softer stance on Ukraine for now. However, we do not know the counterfactual on the situation had oil prices stayed high.</p>
<p>One major issue is related to Ukraine energy imports from Russia. As you know, Ukraine is an energy importer. According to our estimates, the recent drop in oil prices will allow it to save about $4bn on the imported gas bill as well as $3-4bn on petroleum-related imports. Also, Ukraine’s energy dependence on Russia has reduced not only in price but also in volume terms. This limits Russia’s ability to add more pressures on Ukraine.</p>
<p>That being said, our estimates show that Ukraine still will have to buy almost half of its gas imports from Russia in the next few years, as large gas substitution from Europe is unlikely. Therefore, even under a situation with low energy prices, Russia can add pressure on Ukraine along the energy lines. For this reason, in my view, the short-term impact of low energy prices on the Ukraine conflict overall is still limited.</p>
<p><em><strong>Alberto Ades: </strong>Let’s briefly discuss potential impacts on domestic policies in Russia. Vladimir, are these affected as much as foreign policies?</em></p>
<p><strong>Vladimir Osakovskiy: </strong>Sure. In the past, discussions about reforms in Russia have occurred during periods of low oil prices. For example, the USSR started democratization and its move away from the planned economy in the late 1980s when it was facing massive resource constraints due to a sharp decline in oil prices. After oil prices dipped below $10/bbl, Russia was pushed to accept the IMF program in 1998, even though it did not help to avert the default. </p>
<p>Conversely, the intensity of Russia's reforms fell quickly and the government increased its assertive control over society as oil prices started to rise at the beginning of the century. The reformist and democratic agenda had a tentative recovery in 2009 when the oil price dropped below $30/bbl. However, this period faded quickly, just as oil prices recovered quickly.</p>
<p>* * * </p>
<p><strong>Strategy impact will be larger for FX than for rates</strong></p>
<p><em><strong>Alberto Ades: </strong>Gustavo, let’s switch away from regional geopolitics and back into global economics and strategy. As petrodollar recycling dries out, will this hit global liquidity conditions?</em></p>
<p><strong>Gustavo Reis, global economist: </strong>Jean-Michel noted petrodollar flows likely ended up in liquid US financial markets; therefore, <span style="text-decoration: underline;"><strong>a consequent effect would be diminished support for US asset prices. </strong></span>There are other adjustments that can override this, however. Unlike in the 1970s, when oil revenues were mostly recycled through banking channels, the ongoing adjustment in global rates and exchange rates is key to understanding how petrodollar flows will ultimately affect overall financial conditions.</p>
<p>Our Global Liquidity Tracker shows the recent oil price drop coincides with a moderate tightening in global liquidity conditions. The higher market volatility and diminished risk appetite have offset the drop in global bond yields. Much of this reflects global growth concerns, which have also been weighing on oil prices. Moreover, monetary policy in the Euro area and Japan will probably deviate from the playbook of looking through oil price changes by responding assertively to increased deflation risks. </p>
<p>Despite the uncertainty on recycling routes, my view is that petrodollar flows will be of second-order importance to global liquidity in 2015. Estimating the impact of petrodollar flows on global market conditions a decade ago, the International Monetary Fund found them to be limited. <span style="text-decoration: underline;"><strong>A more patient Federal Reserve, additional easing by the European Central Bank and Bank of Japan, as well as the decline in long-term global inflation expectations, will likely dominate. This suggests a contained potential impact of petrodollar flows over and above the market gyrations associated with the oil price plunge.</strong></span></p>
<p><em><strong>Alberto Ades: </strong>Shyam, in terms of strategy, given the GCC’s sizable holdings of US fixed income assets, what will be the impact on US rates? Should we expect a sell-off of US Treasuries?</em></p>
<p><strong>Shyam Rajan, rates strategist: </strong>As Jean-Michel mentioned, there is definitely a risk that countries like Saudi Arabia will draw down liquid US securities to finance any balance of payments gap. After all, according to the latest TIC holdings data, OPEC nations hold about $280bn of UST, with another $200bn held by Russia and Norway.</p>
<p>However, we are less concerned about the impact of this flow on the rates market for two reasons. First, corporate bond and stock holdings of Middle East oil-exporting <br />nations have increased by almost twice that of UST over the last four years (up about $70bn since 2010). This increased preference for higher-yielding and higher-risk assets likely explains why the relationship between UST flows from this region and oil prices has weakened substantially recently. This is consistent with Jean-Michel’s intuition that the emergence of SWFs has probably led to a less risk averse allocation by GCC.</p>
<p>Second, sales by these countries are usually more than offset by other flows. It is important to remember that the top four oil importers excluding the US (China, Japan, India and South Korea) own five times the amount of UST held by the oil exporters. Increased buying from these countries could therefore easily offset any sales. <strong>In addition, a further drop in oil prices as envisioned by Sabine would probably increase risk aversion and safe haven flows into the UST market</strong>.</p>
<p><em><strong>Alberto Ades: </strong>Talk of UST yields and inflation may have implications for Fed action. Mike, could the shift in petrodollar recycling influence the Fed’s monetary policy during 2015?</em></p>
<p><strong>Michael Hanson, United States economist: </strong>Not in my view. For the Fed, the decision on when to begin the tightening cycle will depend on how it assesses the progress toward maximum employment and price stability in the dual mandate. But as the January FOMC statement revealed, financial and international developments will also play a role. <span style="text-decoration: underline;"><strong>If the shedding of US assets by oil-exporting economies results in an appreciable tightening of US financial conditions, the Fed may move later or more gradually in its exit strategy</strong></span>.</p>
<p>* * * </p>
<p>In other words, from irrelevant, to "unambiguously good" if only for those who have zero understanding of what it means, suddenly the end of the Petrodollar recycling chain is said to impact everything from Russian geopolitics, to global capital market liquidity, to safe-haven demand for Treasurys, to social tensions in developing nations, <em><strong>to the Fed's exit strategy.</strong></em> </p>
<p>Or said otherwise, we now know why the Fed felt like adding the word "<a href="http://www.zerohedge.com/news/2015-01-28/unanimous-fed-remains-patient-target-normalize-rates-expects-lower-inflation">international developments</a>" in its latest statement.</p>
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http://www.zerohedge.com/news/2015-02-07/death-petrodollar-was-finally-noticed#commentsAbu DhabiB+Bank of AmericaBank of AmericaBank of JapanBondBorrowing CostsCapital MarketsChinaCrudeCrude OildefaultETCEuropean Central BankEurozoneFederal ReservefixedGlobal EconomyIndiaInternational Monetary FundIranIraqJapanLatAmMarket ConditionsMarket ShareMiddle EastMonetary PolicyNorwayOPECReal estateRecessionrecoverySaudi ArabiaUkraineVolatilitySun, 08 Feb 2015 04:29:46 +0000Tyler Durden501611 at http://www.zerohedge.comGold Falls 2.5%, Silver 3.5% After 'Dodgy' Jobs Numberhttp://www.zerohedge.com/news/2015-02-06/gold-falls-25-silver-35-after-dodgy-jobs-number
<p style="line-height: 1.1500000000000001; margin-top: 0pt; margin-bottom: 10pt;" dir="ltr">Gold and silver fell sharply after the peculiarly positive jobs number this afternoon. Gold fell 2.5% and silver 3.5% as traders took profits and shorted gold due to the much stronger than expected jobs number.</p>
<p style="line-height: 1; margin-top: 0pt; margin-bottom: 10pt;" dir="ltr"><span style="font-size: 15px; font-family: Calibri; color: #222222; background-color: #ffffff; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span id="docs-internal-guid-008bc159-5fdb-28ad-c5bd-ce474542e88f"><span style="vertical-align: baseline;"><img src="https://lh6.googleusercontent.com/AZMjXNmS1-v6jyUc4RDvY9GFfFJar6rbShQ3C01PY3t2kPtS1Q-AbioY8RItDKMwML83LSP6JMRMirH--Gts2htUvg4I3pjS_WwYIq-A-sHuLz5R4saBafH-mBLuhLk-mSE" width="602px;" height="344px;" style="border-style: none; transform: rotate(0rad);" /></span></span><br class="kix-line-break" /></span><span style="font-size: 15px; font-family: Calibri; color: #222222; background-color: #ffffff; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span></p>
<p>Given the spate of recent poor economic numbers in the U.S. and internationally, analysts are beginning to question the veracity of some of the U.S. government's economic statistics including their jobs numbers today.</p>
<p><span style="font-size: 15px; font-family: Calibri; color: #000000; background-color: transparent; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: Calibri;">Only this week,&nbsp;</span></span><span style="font-family: Calibri; font-size: 15px; line-height: 15px; white-space: pre-wrap;">Gallup Chairman and CEO Jim Clifton wrote</span><span style="font-family: Calibri; font-size: 15px; line-height: 15px; white-space: pre-wrap; background-color: transparent;"> a scathing attack on what he calls the government’s “extremely misleading” unemployment statistics. He thus publically declared what many have known for a long time: the U.S.' government’s economic statistics, including unemployment, are grossly and intentionally misstated for the purpose of making the economy appear better than it really is.</span></p>
<p style="line-height: 1; margin-top: 0pt; margin-bottom: 10pt;" dir="ltr"><span style="font-size: 15px; font-family: Calibri; color: #000000; background-color: transparent; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: Calibri;">“There’s no other way to say this,” Clifton wrote on the Gallup website. “The official unemployment rate, which cruelly overlooks the suffering of the long-term and often permanently unemployed as well as the depressingly underemployed, amounts to a Big Lie.”</span></span></p>
<p><span style="font-size: 15px; font-family: Calibri; color: #000000; background-color: transparent; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Zerohedge.com today also asked questions about the jobs report in an excellent blog entitled<a href="http://www.zerohedge.com/news/2015-02-06/did-bls-forget-count-thousands-energy-job-losses"> </a><em><a href="http://www.zerohedge.com/news/2015-02-06/did-bls-forget-count-thousands-energy-job-losses">'Did The BLS Forget To Count Thousands Of Energy Job Losses?'</a> </em>The ahead of the curve blog pointed out that <em>a<span style="font-family: 'Lucida Grande', Verdana, sans-serif; font-size: 13.3333330154419px; line-height: 17.3333320617676px; white-space: normal;">ccording to corporations themselves, there were at least 18,000 terminations in the high-paying energy sector. According to the&nbsp;</span><a href="http://www.bls.gov/news.release/empsit.t17.htm" style="font-family: 'Lucida Grande', Verdana, sans-serif; font-size: 13.3333330154419px; line-height: 17.3333320617676px; white-space: normal;">January payrolls report</a><span style="font-family: 'Lucida Grande', Verdana, sans-serif; font-size: 13.3333330154419px; line-height: 17.3333320617676px; white-space: normal;">, the number of Oil and Gas Extraction workers declined to 199.5K in January from 201.4K in December, a virtually non-existant drop of 1,900 workers (and even the&nbsp;</span><em style="font-family: 'Lucida Grande', Verdana, sans-serif; font-size: 13.3333330154419px; line-height: 17.3333320617676px; white-space: normal;">not seasonally adjusted</em><span style="font-family: 'Lucida Grande', Verdana, sans-serif; font-size: 13.3333330154419px; line-height: 17.3333320617676px; white-space: normal;">, raw data shows a tiny drop of just 3.1K workers). So did the BLS choose to ignore for these thousands of jobs losses, or did it simply forget?</span></em></span></p>
<p></p>
<p style="line-height: 1; margin-top: 0pt; margin-bottom: 10pt;" dir="ltr"><span style="font-size: 15px; font-family: Calibri; color: #000000; background-color: transparent; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img src="https://lh6.googleusercontent.com/jytABEpHXgaXth6RGKQhe4M5ZeNuXxTV44EfpdzZWQm6ZbmG2SLjJtCQQOKth3yUK5_rl29tGvOa_XQCPoiIwUwqqM-LYeE8R-9lcNzox8BsR1llimJ3HtpXJXcNT9AIUAo" width="602px;" height="345px;" style="border-style: none; color: #222222; transform: rotate(0rad);" /></span></p>
<p><span style="font-size: 15px; font-family: Calibri; color: #000000; background-color: transparent; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Gold has flatlined prior to the 'dodgy' jobs number. In Asian trading, </span><a href="http://info.goldcore.com/essential-guide-to-storing-gold-in-singapore" style="text-decoration: none;"><span style="font-size: 15px; font-family: Calibri; color: #1155cc; background-color: transparent; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Singapore gold</span></a><span style="font-size: 15px; font-family: Calibri; color: #000000; background-color: transparent; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="font-size: 15px; font-family: Calibri; color: #222222; background-color: #ffffff; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">moved sideways and this trend continued in European trade. </span><span style="font-family: Calibri; font-size: 15px; white-space: pre-wrap; line-height: 1; background-color: transparent;">Gold is set to end the week down just over 2%. The range this morning has been pretty narrow, less than $7/oz, ahead of this afternoon's non-farm payrolls data.</span></p>
<p>Silver is also flat,while, platinum and &nbsp;palladium are marginally higher.</p>
<p style="line-height: 1; margin-top: 0pt; margin-bottom: 10pt;" dir="ltr"><span style="font-size: 15px; font-family: Calibri; color: #000000; background-color: transparent; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Sentiment towards gold continues to improve and this is seen in the ETF gold demand numbers. </span><span style="font-size: 15px; font-family: Calibri; color: #222222; background-color: #ffffff; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Holdings at SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, rose to 24.86 million ounces on yesterday, the highest since September.</span><span style="font-size: 15px; font-family: Calibri; color: #000000; background-color: transparent; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br class="kix-line-break" /><br class="kix-line-break" /></span></p>
<p style="line-height: 1.2272727272727273; margin-top: 0pt; margin-bottom: 14pt;" dir="ltr"><a href="http://www.goldcore.com/us/market-data/" style="text-decoration: none;"><span style="font-size: 15px; font-family: Calibri; color: #1155cc; background-color: #ffffff; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;"><img src="https://lh6.googleusercontent.com/w5YYYeKw1dUKVL-Bvhc1BxfkYkFLuCijjF9xNLGowfLy7gUvJXrSlYI7zbCrCxJhLJMl1b3VhGKZt5Avvo8C-pzBnhekwWD33ExbB_jpKkJcPwIfYbdbx_XtaoGIQz6q9Ew" width="602px;" height="443px;" style="border: none; transform: rotate(0.00rad);" /></span><span style="font-size: 15px; font-family: Calibri; color: #222222; background-color: #ffffff; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br class="kix-line-break" /></span><span style="font-size: 15px; font-family: Calibri; color: #1155cc; background-color: #ffffff; font-weight: bold; font-style: italic; font-variant: normal; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Gold in Dollars - 5 Years (GoldCore)</span></a></p>
<p style="line-height: 1.2272727272727273; margin-top: 0pt; margin-bottom: 14pt;" dir="ltr"><span style="font-size: 15px; font-family: Calibri; color: #000000; background-color: transparent; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Gold should be supported by the continuing Greek debt saga and deepening tensions between the U.S. and NATO and Russia.</span></p>
<p style="line-height: 1.2272727272727273; margin-top: 0pt; margin-bottom: 14pt;" dir="ltr"><span style="font-size: 15px; font-family: Calibri; color: #000000; background-color: transparent; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Greece's new Finance Minister clashed openly with his powerful German counterpart after blunt talks in Berlin. German Finance Minister Wolfgang Schaeuble said he had told Greece's Yanis Varoufakis it was not realistic to make electoral promises that burdened other countries, and they had "agreed to disagree."</span></p>
<p style="line-height: 1.2272727272727273; margin-top: 0pt; margin-bottom: 14pt;" dir="ltr"><span style="font-size: 15px; font-family: Calibri; color: #000000; background-color: transparent; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Greece’s borrowing costs have leapt and bank shares plunged following the ECB's decision to stop funding the country's lenders. </span><span style="font-size: 15px; font-family: Arial; color: #4a4a4a; background-color: transparent; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Greek banks were already struggling with big outflows of deposits and stealth bank runs are believed to be continuing</span><span style="font-size: 15px; font-family: Calibri; color: #000000; background-color: transparent; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">.</span><span style="font-size: 15px; font-family: Calibri; color: #222222; background-color: #ffffff; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br class="kix-line-break" /></span><span style="font-size: 15px; font-family: Calibri; color: #222222; background-color: #ffffff; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br class="kix-line-break" /></span><a href="http://www.goldcore.com/ie/market-data/" style="text-decoration: none;"><span style="font-size: 15px; font-family: Calibri; color: #1155cc; background-color: transparent; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;"><img src="https://lh3.googleusercontent.com/gbGREJAkLN5lI5xOMy9G56XT7AJ9edtwzJ-R6cmquCvTb1_wKu4ukhxAY0kAEEHL2IZTOhQ8K7gn-xZZpm1scxvlkXp6gCHqOp9MiHVgdZz3rFpqHj43tzruNrSvteDkXuU" width="602px;" height="488px;" style="border: none; transform: rotate(0.00rad);" /></span><span style="font-size: 15px; font-family: Calibri; color: #000000; background-color: transparent; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br class="kix-line-break" /></span><span style="font-size: 15px; font-family: Calibri; color: #1155cc; background-color: #ffffff; font-weight: bold; font-style: italic; font-variant: normal; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Gold in Euros - 5 Years (GoldCore)</span></a></p>
<p style="line-height: 1.2272727272727273; margin-top: 0pt; margin-bottom: 14pt;" dir="ltr"><span style="font-size: 15px; font-family: Calibri; color: #333333; background-color: #ffffff; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Nato is to 'bolster' America's military presence in Eastern Europe in response to increased fighting in eastern Ukraine between government forces and pro-Russia rebels. Six bases are being set up and a 5,000-strong "spearhead" force established.</span></p>
<p style="line-height: 1; margin-top: 0pt; margin-bottom: 10pt;" dir="ltr"><span style="font-size: 15px; font-family: Calibri; color: #222222; background-color: #ffffff; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The U.S. is now talking about arming Ukraine which will further inflame the situation and likely lead to an escalation in the conflict.</span></p>
<p style="line-height: 1; margin-top: 0pt; margin-bottom: 10pt;" dir="ltr"><span style="font-size: 15px; font-family: Calibri; color: #222222; background-color: #ffffff; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">German Chancellor Angela Merkel says she and French President Francois Hollande will "use all our power" on their visit to Moscow to try and stop the bloodshed in eastern Ukraine.</span></p>
<p style="line-height: 1; margin-top: 0pt; margin-bottom: 10pt;" dir="ltr"><span style="font-size: 15px; font-family: Calibri; color: #222222; background-color: #ffffff; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Speaking Friday before flying to Russia for talks with President Vladimir Putin, Merkel said she could not say whether she and Hollande, who were in Kiev for talks Thursday with the Ukrainian government, would be able to achieve a new cease fire.</span></p>
<p style="line-height: 1; margin-top: 0pt; margin-bottom: 10pt;" dir="ltr"><a href="http://www.goldcore.com/uk/market-data/" style="text-decoration: none;"><span style="font-size: 15px; font-family: Calibri; color: #1155cc; background-color: #ffffff; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;"><img src="https://lh6.googleusercontent.com/plu7O-hhDXswUYjGi5nOig3rF9FtleTwXbrfd123dJLtGDd3gMxtFknUF_h_Wctv3kqsA7kxr3qIhPmHn3ph-i_yQwEfaO9Dro3Wjkvdz4VPc6zv4b-mqzuiKyEu0xWRFVQ" width="602px;" height="448px;" style="border: none; transform: rotate(0.00rad);" /></span><span style="font-size: 15px; font-family: Calibri; color: #222222; background-color: #ffffff; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br class="kix-line-break" /></span><span style="font-size: 15px; font-family: Calibri; color: #222222; background-color: #ffffff; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br class="kix-line-break" /></span><span style="font-size: 15px; font-family: Calibri; color: #1155cc; background-color: #ffffff; font-weight: bold; font-style: italic; font-variant: normal; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Gold in British Pounds - 5 Years (GoldCore)</span></a></p>
<p style="line-height: 1; margin-top: 0pt; margin-bottom: 10pt;" dir="ltr"><span style="font-size: 15px; font-family: Calibri; color: #222222; background-color: #ffffff; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Geopolitical risk remains high with relations between Russia and the U.S. and NATO continuing to deteriorate. </span></p>
<p style="line-height: 1; margin-top: 0pt; margin-bottom: 10pt;" dir="ltr"><span style="font-size: 15px; font-family: Calibri; color: #222222; background-color: #ffffff; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">NATO sabre rattling was seen yesterday when the former head of Nato warned that &nbsp;Vladimir Putin has dangerous ambitions beyond Ukraine and aims to test Western resolve in the Baltic states. Anders Fogh Rasmussen, the former secretary-general of the Atlantic alliance, said the Kremlin’s true goal is to shatter NATO solidarity and reassert Russian dominance over Eastern Europe.</span></p>
<p style="line-height: 1; margin-top: 0pt; margin-bottom: 10pt;" dir="ltr"><span style="font-size: 15px; font-family: Calibri; color: #222222; background-color: #ffffff; font-weight: normal; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The very uncertain geopolitical backdrop is supportive of gold. Another incident such as the tragic shooting down of the civilian airline could be a catalyst to a wider conflict.</span></p>
<p style="margin-top: 0pt; margin-bottom: 10pt; line-height: 1.15;" dir="ltr"><span style="font-size: 15px; font-family: Calibri; vertical-align: baseline; white-space: pre-wrap; background-color: transparent;"><span style="line-height: 20.7999992370605px; color: #222222; vertical-align: baseline;">Yesterday, </span><a href="http://www.goldcore.com/" style="font-family: Verdana, Arial, Helvetica, sans-serif; font-size: 1em; font-weight: bold; line-height: 1;"><span style="font-family: Calibri; color: #1155cc; text-decoration: underline; vertical-align: baseline;">gold</span></a><span style="line-height: 20.7999992370605px; color: #222222; vertical-align: baseline;"> and silver were mixed. Gold gained 0.36 per cent or $4.90 yesterday, closing at $1,270.20, while silver fell 0.35 percent or $0.06, closing at $17.30.</span><span style="line-height: 20.7999992370605px; font-weight: bold; color: #222222; vertical-align: baseline;"></span></span></p>
<p>Today’s AM fix was USD 1,264, EUR 1,103.64 and GBP 824.74 per ounce.<span style="font-size: 15px; font-family: Calibri; vertical-align: baseline; white-space: pre-wrap; background-color: transparent;"><br class="kix-line-break" /></span><span style="font-size: 15px; font-family: Calibri; vertical-align: baseline; white-space: pre-wrap; background-color: transparent;">Yesterday’s AM fix was USD 1,263.75, EUR 1,106.71 and GBP 828.80 per ounce.</span></p>
<p><span id="docs-internal-guid-008bc159-5fd8-d32a-0bb6-cded7f4d0e29"><span style="font-size: 15px; font-family: Calibri; font-weight: bold; vertical-align: baseline; white-space: pre-wrap; background-color: transparent;">Get Breaking News and Updates On Markets </span><a href="http://info.goldcore.com/goldcore_email_subscription_preferences"><span style="font-size: 15px; font-family: Calibri; color: #1155cc; font-weight: bold; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap; background-color: transparent;">Here</span></a></span></p>
http://www.zerohedge.com/news/2015-02-06/gold-falls-25-silver-35-after-dodgy-jobs-number#commentsBLSBorrowing CostsEastern EuropeGallupUkraineUnemploymentVladimir PutinFri, 06 Feb 2015 17:22:20 +0000GoldCore501563 at http://www.zerohedge.com